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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000 Commission File Number: 0-24866
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ISOLYSER COMPANY, INC.
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(Exact Name of registrant as specified in its charter)
GEORGIA 58-1746149
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4320 INTERNATIONAL BOULEVARD
NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
(770) 806-9898
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of 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 __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of common stock held by nonaffiliates of the
registrant based on the sale trade price of the common stock as reported on The
Nasdaq Stock Market on March 16, 2001, was approximately $34.3 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 16, 2001, there were outstanding 41,593,984 shares of the registrant's
common stock, $.001 par value per share.
Documents incorporated by reference: Certain exhibits provided in Part IV are
incorporated by reference from the Company's Registration Statements on Form S-1
(File Nos. 33-83474 and 33-97086), Registration Statement on Form S-4 (File No.
333-7977), Registration Statement on Form S-8 (File Nos. 33-85668), annual
reports on Form 10-K for the periods ended December 31, 1994, December 31, 1995,
and December 31, 1996, quarterly report on Form 10-Q for the period ended
September 30, 1999, Schedule 14A filed on April 14, 1999, and current reports on
Form 8-K dated May 31, 1995, September 18, 1995, June 4, 1996, August 30, 1996,
December 19, 1996, August 11, 1998, June 29, 1999 and July 12, 1999.
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Note: The discussions in this Form 10-K contain forward-looking
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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 2001
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") currently has two
major operating units. OREX Technologies International ("OTI"), a division of
Isolyser, focuses on the commercialization of Isolyser's disposal technologies.
The other unit, Microtek Medical, Inc. ("Microtek"), an Isolyser subsidiary, is
the centerpiece of Isolyser's Infection Control business serving the healthcare
industry.
OTI believes that it is the first company to offer high performance
contamination control materials and products coupled with engineered systems for
the treatment and disposal of those materials and products. Isolyser takes a
life cycle approach to engineering its materials and disposal systems for those
materials to include material performance requirements, waste management
analysis, regulatory compliance and life cycle cost management. The Company
focuses upon markets requiring high performance materials subject to regulatory
requirements such as hospital operating rooms, the nuclear industry and metal
painting operations in the automotive industry.
Microtek's broad range of healthcare products provide patient care and
safety benefits, including protection from cross-infection, by providing Point-
of-Generation(TM) treatment of potentially infectious and hazardous waste. The
Company believes that its products benefit the environment by reducing the
volume of solid waste while significantly reducing the disposal costs of such
waste. In this way, Isolyser offers protection from potentially infectious and
hazardous waste for patients, staff, the public and the environment. Similar to
the healthcare industry, some industrial markets, such as metal painting
operations in the automotive and aerospace industries and the nuclear industry,
operate heavily regulated "controlled environments". Any product or service that
is supplied to these markets must satisfy detailed materials and product
performance specifications, as well as comply with regulations for the disposal
of hazardous waste. In these and many other demanding industrial markets,
Isolyser's technology of materials, products and engineered treatment and
disposal systems offers a unique combination of product features and end-user
benefits including life cycle cost management and ecological advantages.
In 2000, the Company formed a new subsidiary, MindHarbor, Inc.
("MindHarbor"). MindHarbor provides information technology services including
website and intranet design and support, marketing and electronic commerce
business development. To date, MindHarbor's revenues and operating results have
not been material to the Company.
Business Strategy
The Company's goal is to become a leading developer and provider of high
performance materials and integrated technology systems for the treatment and
disposal of those materials in markets subject to environmental or regulatory
control. The Company intends to improve its operating results through the
commercialization of its OREX(R) Degradable products, increased focus upon the
infection control business of Microtek, and continued new product development.
Commercializing OREX Degradables. The Company seeks to commercialize its
OREX Degradable products by improving the product to better satisfy customer
needs and provide added value within a range of markets. The Company seeks to
achieve these goals through offering materials with superior product performance
and contamination control characteristics, while reducing material costs on a
life cycle basis from materials purchasing through disposal, and accomplishing
the foregoing in an ecologically beneficial way. To expand its
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resources, the Company from time to time seeks to enter into strategic alliances
with third parties to more rapidly commercialize OREX Degradables. There can be
no assurance that OREX Degradables will achieve or maintain substantial
acceptance in their target markets. See "Risk Factors - History of Net Losses"
and "-Marketing Risks Affecting OREX Products".
Increased Focus on Infection Control Businesses. The Company seeks to
increase sales and earnings from its infection control business by completing
strategic acquisitions, enhancing marketing and distribution efforts both
domestically and internationally, introducing new products, increasing direct
sales representation, employing tele-sales agents for added sales coverage, and
capitalizing on low-cost manufacturing opportunities in the Dominican Republic.
Continuing New Product Development. The Company plans to continue to
improve, develop and introduce new and innovative products to the marketplace
designed to promote cost-effective achievement of occupational safety,
environmental protection and regulatory compliance objectives through continued
research and development. In addition, the Company will continue to substantiate
the safety and effectiveness of its products with testing and seek regulatory
approval for use of its products where applicable. See "Risk Factors - Marketing
Risks Affecting OREX Products" and "- Regulatory Risks".
Products and Markets
OREX Degradables and Enviroguard
OREX Degradables and Enviroguard(TM) are a combination of materials and
products that provide protection to people and the environment while providing
cost effective solutions to the problems associated with solid waste reduction
and disposal. OREX Degradables are manufactured from two generations of hot
water dispersible materials which can be configured into an array of materials
and products. The materials include woven and nonwoven fabrics; resin; film and
hard plastics and profile extruded materials. Woven fabrics converted into
healthcare products include operating room towels, absorbent gauze and
laparotomy sponges. Nonwoven fabrics converted into healthcare products include
surgical gowns, patient drapes, mop heads and surgical head wear. Film may be
converted into products including fluid collection bags, packaging materials and
equipment drapes. Products for a wide range of other market sectors generically
known as industrial markets include wiping substrates; mops; protective apparel
and other items of personal protective equipment. OREX Degradables perform like
traditional disposable and reusable products; however, unlike traditional
products, OREX Degradables can be degraded or dissolved in hot water in a
specially designed OREX Processor after use for safe disposal through the
municipal sewer system or other specialty engineered treatment and disposal
systems. Enviroguard is the Company's trademark for a spunlaced OREX Degradables
fabric that is softer, more flexible and cooler than earlier generation OREX
products. See "Risk Factors - History of Net Losses", "- Marketing Risks
Affecting OREX Products", "- Manufacturing and Supply Risks" and "- Regulatory
Risks".
The Company was initially focused on delivering OREX Degradables to the
healthcare industry. In connection with the Company's sale of its MedSurg
business to Allegiance on July 12, 1999, Isolyser granted to Allegiance an
exclusive worldwide license to manufacture, use and sell products made with
Isolyser's proprietary degradable materials for use in healthcare applications.
Under the terms of the license, Isolyser will be the sole supplier to Allegiance
of OREX degradable materials for use in the healthcare field provided Isolyser
satisfies its supply obligations. Allegiance is committed to purchase a certain
minimum quantity of Enviroguard fabric, subject to reduction if Isolyser fails
to obtain regulatory approvals for the dissolution of material in certain
scheduled markets within certain scheduled timeframes. If Allegiance fails to
satisfy its purchase commitment, the license becomes non-exclusive. Allegiance
has agreed to pay Isolyser a royalty equal to a percentage of the net sales
price of product sold by Allegiance to customers who use the product dissolution
technology. The license has an initial term expiring in April, 2003. In the
event of the acquisition of more than 50% of the outstanding capital stock of
Isolyser or the sale of all or substantially all Isolyser's assets to a person
or entity not affiliated with Isolyser, the license extends for three years
following the date of such change in control and becomes non-exclusive. In
January 2001, the Company and Allegiance entered into an agreement suspending
Allegiance's minimum purchase obligation until such time as Isolyser has
satisfactorily resolved certain development challenges including the completion
and installation of a new generation of OREX processors and reevaluation of the
economic terms of the license. Isolyser and Allegiance agreed to pursue these
development challenges through the remainder of 2001, at which time the parties
would jointly review and evaluate all options relating to the ongoing
relationship between Allegiance and Isolyser. No assurances can be
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provided that the parties will successfully commercialize OREX Degradables in
the healthcare industry. See "Risk Factors - Marketing Risks Affecting OREX
Products".
Management also believes that the technology used to develop OREX
Degradables has the potential for commercial applications beyond the healthcare
industry where protection from potentially infectious or hazardous waste and
reduction of solid waste is important, such as the automotive paint and nuclear
power industries. Under an agreement dated June 14, 1999, the Company has
granted RJ Hanlon Company, Inc. a three year license providing for exclusive
global distribution rights to covers manufactured from OREX film for robots used
in automotive paint operations and non-exclusive rights for the distribution and
sale of OREX specialty wipes in the North American automobile industry. RJ
Hanlon has manufactured and sold custom designed covers for the automobile
industry for approximately twenty years. The OREX robot covers have passed
independent laboratory tests for cleanliness and paint operation compatibility
for two North American automobile manufacturers. On February 16, 2001, the
Company acquired a disposal technology which in laboratory tests has
successfully degraded OREX Degradables contaminated with low level radioactive
waste resulting in substantial reductions of contaminated waste. This technology
is presently being developed for use in the nuclear power industry. To date, no
significant sales have been made by Isolyser to the automotive painting or
nuclear power industry. See "Risk Factors - Marketing Risks Affecting OREX
Products".
Unlike traditional disposable products that must be disposed of through
either incineration or landfill, OREX Degradables may be disposed of at the
Point-of-Generation by dissolving or degrading the product through processing
the OREX material in hot water. Disposal in this manner reduces the need for
storage, handling and off-site transportation of waste, reduces the potential
for cross-infection, reduces the total volume of solid waste and facilitates
regulatory compliance. It is also designed to facilitate life-cycle cost
reduction and environmentally responsible disposal of waste. The processing of
OREX materials may involve special engineering requirements depending upon the
industry in which the processing technology is being used. For example, the
healthcare industry's processing of OREX largely involves the disposal of blood
with or without infectious disease contamination. In this industry, the Company
uses an OREX processor similar to a commercial washing machine to process the
material for disposal through the municipal sewer system. An industry standard
method for disposal of blood, with or without infectious disease contamination,
is through the municipal sewer system. While the Company makes no claims or
representations in its product advertising or labeling that the disposal method
for OREX Degradables renders the disposal matter non-infectious, independent
test results indicate that dissolving OREX Degradables in hot water inactivates
in excess of 99% of tested microorganisms. Disposal in this manner is not
subject to federal regulation but may be regulated by state and local sewage
treatment plants to the extent that sewer discharges from hospitals or other
facilities may interfere with the proper functioning of such plants. Based on
product testing and available research, the Company believes that OREX
Degradables manufactured from PVA will not interfere with the proper functioning
of sewage treatment plants. Based on such testing and research, the Company has
obtained over 100 written and verbal non-binding concurrences and is in the
process of seeking additional non-binding concurrences with the Company's
conclusions from local authorities. While the Company is undertaking evaluation
of OREX Degradables manufactured from polymers other than PVA, no assurances can
be provided that such non-PVA based OREX will not interfere with the proper
functioning of sewage treatment plants. The processing of OREX materials in the
automotive paint and nuclear power industries involves separate engineering
requirements. In the automotive industry, paint and solvent contaminated waste
is classified as hazardous and incurs a high cost of disposal. OTI has developed
a processing and wastewater treatment system that renders OREX Degradables
materials non-hazardous accompanied by a reduction in hazardous waste disposal
costs. Based on industry tests conducted to date, this method of waste
management complies with automotive wastewater treatment and permitting
requirements. In the nuclear industry, OTI has acquired a disposal technology
which in laboratory tests has successfully achieved substantial reductions in
the volume of OREX Degradable materials contaminated with low level radioactive
waste resulting in the potential for disposal cost savings. See "- Government
Regulation" and "Risk Factors - Regulatory Risks".
Management has not been satisfied with the Company's performance to date
in manufacturing and selling OREX Degradables. In particular, the Company has
failed to achieve profitable margins on sales of OREX products. Accordingly, the
Company has sought to improve its operating results by, among other things,
reducing its marketing efforts directed towards the sale of OREX Degradables,
divesting itself of underperforming assets, reducing the amount of its debt, and
forming the OTI business unit to provide increased focus on OREX commercial
development. As a result of the Company's sale of its selling, marketing and
manufacturing facilities previously used for OREX products, OTI now engages in
the strategy of relying upon third parties for such selling, marketing and
manufacturing functions. See "- Marketing and Distribution", "- Manufacturing
and Supplies", "Risk Factors - History of Net Losses", "- Marketing Risks
affecting OREX Products" and "-Manufacturing and Supply Risks".
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Infection Control Products
In 1998 the Company formed a business unit called the Infection Control
Group which consists primarily of the equipment drape, fluid control and safety
products manufactured by Microtek. Consistent with its niche market strategy,
Microtek is actively engaged in the development of new products and the
refinement of its existing products to respond to the needs of its customers and
the changing technology of the medical products industry. Many of the Company's
product innovations have been generated from requests by the Company's customers
and health care professionals for products to be custom designed to address
specified problems in the operating room environment. The Company also monitors
trends in the health care industry and performs market research in order to
evaluate new product ideas. No assurance can be given that any new product will
be successfully developed or that any newly developed product will achieve or
sustain market acceptance.
Microtek designs, manufactures and markets two principal product lines
for use in niche markets of the healthcare industry. First, Microtek's infection
control products consist of more than 1,500 specially designed drapes for use in
draping operating room equipment during surgical procedures. This equipment
includes, for example, microscopes, ultrasound probes, endoscopic video cameras,
x-ray cassettes, imaging equipment, lasers and handles attached to surgical
lights. In addition to reducing the risk of cross-infection, these products
increase operating room efficiency by reducing the need to sterilize equipment
between procedures. These disposable sterile products are generally made from
plastic film containing features designed for the operating room environment,
such as low glare and anti-static features. During 1999 the Company completed
its development of a complete line of plastic (film) patient drapes that include
a full line of adhesive incise drapes including a subset of adhesive drapes that
have an anti-microbial agent incorporated into the film. The anti-microbial
incise drapes are patented and are a joint development of the Company and
Microban Products Company and are marketed under the trade names of Microtek
Medical and Microban(R). Microtek's second principal product line, fluid-control
products, are specially designed disposable pouches which are attached to a
surgical patient drape (called a substrate), which is placed around the
operative site. For instance, Microtek manufactures a specialty pouch for knee
arthroscopy. This pouch captures not only the bodily fluids that are discharged
from the knee but also the sterile saline that is infused into the operative
site during the arthroscopic procedure. Microtek's fluid control product line
primarily consists of more than 200 different plastic disposable collection
pouches.
In the first quarter 2001, Microtek acquired substantially all of the
assets of Deka Medical, Inc. ("Deka") used in Deka's drape product lines. These
products are highly compatible with Microtek's product lines. The Company
believes this transaction will benefit the Company by leveraging Deka's revenues
on the existing manufacturing and selling infrastructure in place at Microtek,
improving the diversification of Microtek's customer base and product line, and
adding experienced management to Microtek's existing personnel.
For 1998, 1999 and 2000, sales of Microtek products accounted for
approximately 33%, 59% and 92% of the Company's total revenues, respectively.
Included in such sales figures are $8.6 million, $6.8 million and $5.7 million
of export sales by Microtek during 1998, 1999 and 2000, respectively.
The Company offers several other lines of products for the management of
potentially infectious and hazardous waste. The leading lines of these safety
products are described below.
Liquid Treatment System (LTS) is a super-absorbent powder which converts
potentially infectious liquid waste into a solid waste, 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. Microtek is in the process of bringing the next generation product
to the market called LTS-Plus. LTS-Plus is EPA registered as a medical waste
treatment product. This adds the extra benefit to the end-user of being able to
dispose of LTS-Plus treated waste directly in a landfill, where local regulation
permits. 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,
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thus encapsulating the sharps and reducing the risk of accidental punctures. The
container of SMS treated sharps is suitable for handling, transportation and
disposal.
The Company also manufactures and markets various other products. In
April, 1996, Microtek purchased the Venodyne division of Advanced Instruments,
Inc. which manufactures and markets pneumatic pumps and disposable compression
sleeves for use in reducing deep vein thrombosis. Sales of these products have
not been material to the Company's results of operations.
The Company acquired Microtek in a pooling of interests transaction as
of September 1, 1996, and the Company's financial statements prior to the
acquisition date have accordingly been restated to include Microtek's financial
statements. Microtek is a Delaware corporation which, prior to the Microtek
acquisition, operated independently following its spin-off from Teknamed
Corporation, a medical products company, in 1984.
Marketing and Distribution
Substantially all of the Company's sales in 2000 were made to the
healthcare market.
As of December 31, 2000, the Company's marketing and sales force
consisted of 28 sales representatives, four field sales managers, one home
office sales manager, five marketing managers and 35 persons in customer
support.
The Company is dependent upon a few large distributors for the
distribution of its products. The Company's top three customers accounted for
approximately 27% of the Company's total revenues during 2000. Of these
customers, only Allegiance accounted for over 10% of the Company's total sales
during 2000. Due to the exclusive worldwide nature of the license granted by
Isolyser to Allegiance, the Company will depend exclusively upon Allegiance
during the term of that license for sales of OREX and Enviroguard products to
healthcare markets. Because distribution of medical products is heavily
dependent upon large distributors, the Company anticipates that it will remain
dependent upon these customers and others for the distribution of its products.
If the efforts of the Company's distributors prove unsuccessful, or if such
distributors abandon or limit their distribution of the Company's products, the
Company's sales may be materially adversely affected. See "Risk Factors -
Reliance Upon Distributors".
The Company sells its equipment drapes and fluid control products
through distributors and custom procedure tray companies. The Company also
markets certain of its products to other manufacturers on a "non-branded" or
private label basis. For example, the Company's fluid control pouches are sold
to manufacturers of substrates, and the Company's equipment drapes are sold to
manufacturers of the equipment for which such drapes were designed.
The Company's total export sales during 1998, 1999 and 2000 were $11.1
million, $7.0 million and $5.7 million, respectively. Outside the United States,
the Company markets its products principally through a network of approximately
162 different dealers and distributors. As of December 31, 2000, the Company
also had two sales representatives operating in international markets, and
maintains an office and warehouse distribution center near Manchester, England.
Isolyser sells its LTS product line under a non-exclusive distribution
agreement with Allegiance, a leader in the sale of suction canisters and related
apparatus. The agreement expires February 28, 2002 and is subject to renewal for
one-year terms thereafter unless otherwise terminated. The Company also
distributes LTS through other national distributors.
To further expand its marketing resources, the Company from time to time
seeks to enter into strategic alliances with third parties such as specialty
equipment manufacturers and other non-competitive companies which would enable
it to sell various of its products. While the Company from time to time engages
in such discussions, the Company provides no assurances that any such strategic
alliances will be consummated or, if consummated, that any such alliance will be
favorable to the Company.
Manufacturing and Supplies
OREX is manufactured from a family of organic polymers that dissolve or
disperse in hot water and degrade in the wastewater system or in custom designed
OREX processing equipment. Woven and nonwoven products are manufactured using
PVA-based polymer chemistry. PVA is a safe material used widely in a variety of
consumer products such as eye drops, cosmetics and cold capsules. The Company
has more recently begun to develop and
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commercialize the use of a second generation polymer system known generically as
its Novel Degradable Polymer or NDP-system. This system is currently being
developed for the manufacture of OREX Degradables film, composites of film with
nonwoven fabric, and extruded, thermoformed or injection molded solid plastic
items. This NDP family of polymers disperses and then degrades in a processing
step which is initiated by the action of hot water at an elevated pH. The
Company currently obtains its PVA raw materials from various foreign suppliers.
Risks exist in obtaining the quality and quantity of PVA at a price that will
allow the Company to be competitive with manufacturers of conventional
disposable and reusable products. Prevailing prices of PVA have adversely
affected the Company's manufacturing costs for its OREX products. PVA resin from
Japan, Taiwan and certain producers in China are subject to anti-dumping duties
if imported into the United States. See "Risk Factors - Manufacturing and Supply
Risks".
Until 1997, the Company had followed a strategy of capital equipment
purchases and acquisitions to expand and vertically integrate the Company's
manufacturing capabilities, thereby enabling the Company to manufacture and
convert into finished goods many OREX Degradables internally. The Company
acquired OREX material manufacturing plants as a part of this expansion
strategy. In 1998, the Company sold its OREX materials manufacturing plants.
These plants were used by the Company to convert PVA fiber into OREX nonwoven
roll goods and towels. In connection with the sale, the Company sold 4.5 million
pounds of excess PVA fiber at a price of $.45 per pound under an agreement
pursuant to which the Company agreed to repurchase 2.6 million pounds of such
fiber (either as fiber or converted goods) over a four year period at a cost of
$.80 per pound of fiber. Through 2000, the Company has paid $1.2 million for
such fiber. See "Risk Factors - Manufacturing and Supply Risks".
The Company has developed and begun sourcing OREX materials and
Enviroguard fabric using the hydroentangled method of nonwoven roll-good
material manufacturing. This process is neither chemically nor thermally bonded.
Through these roll-good material development and manufacturing efforts, both
domestic and internationally, the Company seeks to reduce the cost of producing
OREX drapes and gowns while simultaneously improving the quality of these
products. The Company currently sources all of these roll goods from outside the
United States. The Company has initially relied on manufacturers in China for
its nonwoven materials and is seeking to reduce its supply risks by sourcing
such materials from manufacturers in other locations. For example, the Company
has recently begun to have manufacturers located in Israel, Italy and North
America supply nonwoven materials.
The Company now relies exclusively on domestic and foreign independent
manufacturers to supply OREX products to the Company's customers. The Company
uses contractors in the People's Republic of China to manufacture OREX sponge
products and spunlaced OREX fabric. The Company has used various independent
parties (both domestically and internationally) to manufacture various OREX
thermoformed, extruded and composite products which have not yet been offered
for commercial sale by the Company. The Company's requirements (which to date
have been modest) for OREX film products are currently being supplied by a
contract manufacturer. The Company has not yet successfully reduced the cost of
manufacturing OREX thermoformed and extruded products and OREX film products to
a sufficient degree to offer such products commercially, although the Company
seeks to use its NDP technology to reduce the cost of manufacturing OREX film
products. See "Risk Factors - Manufacturing and Supply Risks".
The Company manufactures its equipment drapes and fluid control products
at its facilities in Columbus, Mississippi and the Dominican Republic. The
Company utilizes a facility in Jacksonville, Florida as a distribution point for
receipt and shipment of product and for light manufacturing. The Company also
maintains a distribution facility near Manchester, England. In connection with
the Company's acquisition of drape product lines from Deka, the Company acquired
additional leased facilities in Tyler, Texas, Athens, Texas and the Dominican
Republic where it manufactures equipment drapes, and a leased manufacturing and
warehouse facility in Waynesville, North Carolina.
The Company currently relies upon independent manufacturers for the
purchase of materials and components for most of its safety products. The
Company uses, and expects to continue to use, vendors of stock items to the
extent possible to control direct material costs for its safety products. The
Company's safety products production facilities located in Columbus, Mississippi
are used for mixing liquid and powdered chemicals, other light manufacturing and
packaging.
Order Backlog
At December 31, 2000, the Company's order backlog totaled approximately
$473,000 compared to approximately $356,000 (in each case net of any
cancellations) at December 31, 1999. All backlog orders at December 31, 2000 are
expected to be filled prior to year end 2001. Microtek typically sells its
products pursuant to written
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purchase orders which generally may be canceled without penalty prior to
shipment of the product. Accordingly, the Company does not believe that the
level of backlog orders at any date is material or indicative of future results.
Technology and Intellectual Property
The Company seeks to protect its technology by, among other means,
obtaining patents and filing patent applications for technology and products
that it considers important to its business. The Company also relies upon trade
secrets, technical know-how and innovation and market penetration to develop and
maintain its competitive position.
The Company holds several patents issued by the U.S. Patent and
Trademark Office concerning methods of disposing of OREX Degradables, including:
(1) US Patent 5,207,837, issued in 1993 and successfully reexamined (B1
6,207,834) by the U.S. Patent Office in 1996, which covers a method of disposing
OREX materials that are configured into a drape, towel, cover, overwrap, gown,
head cover, face mask, shoe covering, sponge, dressing, tape, underpad, diaper,
wash cloth, sheet, pillow cover, or napkin; (2) US Patent 5,181,967, issued in
1993 and successfully reissued (RE 36399) in 1999, and which covers a method of
disposing particular OREX materials utensils such as procedure trays, laboratory
ware, and patient care items; (3) US Patent 5,181,966, issued in 1993 and
successfully reexamined (B1 5,181,966) in 1996, and which covers a method of
disposing OREX materials configured into packaging materials; and (4) US Patent
No. 6,048,410, issued in 2000, and which covers a method of disposing PVA
garments, linens, drapes and towels.
Isolyser also has several patents which cover particular OREX products,
including (1) US Patent 5,650,219, which was issued in 1995 and covers a method
of disposing particular OREX materials configured into garments, linens, drapes,
and towels; (2) US Patent 5,620,786, issued in 1997 and covers particular OREX
materials that are configured into towels, sponges or gauze; (3) US Patent
5,268,222, issued in 1993 and covers a composite fabric made with an OREX
materials; (4) US Patent 5,885,907, issued in March, 1999, and covers particular
OREX materials configured into a towel, sponge, or gauze; (5) US Patents
5,470,653 and 5,707,731, issued in 1995 and 1998, and which cover mop heads made
from OREX materials; (6) US Patent 5,985,443, issued November, 1999, and which
covers the methods of disposing a mop head; and (7) JP Patent No. 3060180,
issued April, 2000, and which covers mop heads made from OREX materials.
Isolyser also has patents that cover methods of producing OREX brand
products, including: (1) US Patent 5,871,679, issued in February, 1999, and
which covers methods for producing OREX Degradables that are configured into
thermoplastic films and fabrics; (2) US Patent 5,661,217, issued in 1997, which
covers a method of forming molded packaging and utensils from OREX materials and
methods of forming OREX brand films into a packaging, drape, cover, overwrap,
gown, head cover, face mask, shoe cover, CSR wrap, tape, underpad or diaper; (3)
US Patent 5,972,039, issued October, 1999, and which covers methods for
enhancing the absorbency and hand feel of OREX brand fabrics; and (4) US Patent
5,871,679 for producing OREX materials that are configured into film and fabric.
The Company also has several issued patents related to its SMS and LTS
technologies.
The Company currently has several applications pending before the U.S.
Patent and Trademark Office which relate to OREX brand products. Specifically,
those applications concern (i) a new class of OREX biodegradable polymers, (ii)
methods for enhancing the absorbency and hand feel of OREX brand fabrics, (iii)
finishing formulations for OREX materials, (iv) a pipeliner manufactured with
OREX, (v) medical containers made from OREX materials, (vi) a method of
absorbing oil with OREX materials fabric, (vii) PVA fabric that is made from the
spunlace process, including PVA spunlaced fabrics that are configured into
surgical gowns, drapes, and industrial wipes, (viii) wipes made from any PVA
substrate, (ix) equipment covers made from OREX, (x) methods of treating
industrial and medical waste, and (xi) PVA fabrics that are coated on both sides
for greater repellency. The Company is not aware of any facts at this time that
would indicate that patents sought by these applications will not be issued;
however, no assurances can be provided that patents will issue from these
applications. See "Risk Factors - Protection of Technologies."
The Company's U.S. patents expire between 2007 and 2020. The Company
files for foreign counterpart patents on those patents and patent applications
which the Company considers to be material to its business. No assurance can be
given that the various components of the Company's technology protection
arrangements utilized by the Company to protect its technologies, including its
patents, will be successful in preventing others from making
8
products competitive with those offered by the Company, including OREX. 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. Microtek
holds a US patent covering a surgical drape having incorporated therein a broad
spectrum antimicrobial agent which expires in 2010. To date, such license and
patent have not been material to the Company's operations.
The Company has registered as trademarks with the U.S. Patent and
Trademark Office "Isolyser," "OREX", "LTS" and "SMS". In addition, the Company
is applying to register the trademark "Enviroguard" in the U.S. Patent and
Trademark Office. Trademark registrations for "Isolyser", "OREX" and "LTS" have
also been granted in various foreign countries. Microtek maintains registrations
of various trademarks which the Company believes are recognized within their
principal markets.
Competition
The markets in which the Company competes are characterized by
competition on the basis of quality, price, product design and function,
environmental impact, distribution arrangements, service, customer relationship,
and convenience. Many of the Company's competitors have significantly greater
resources than the Company. See "Risk Factors - Competition".
Although the Company is not aware of any products currently available in
the market place which provide the same disposal and degradable benefits as OREX
Degradables and Enviroguard, these products compete with traditional disposable
and reusable products currently marketed and sold by many companies. Single use
disposable (as opposed to reusable) drapes and gowns have been available for
over 25 years and according to a 1992 market study account for over 80% of the
surgical market. Competing manufacturers of traditional disposable medical
products are large companies with significantly greater resources than those of
the Company. These competitors have in many instances followed strategies of
aggressively marketing products competitive with OREX Degradables to buying
groups resulting in increasing cost pressures. These factors have adversely
affected the Company's ability to adjust its prices for its OREX products to
take into account disposal cost savings provided by these products, and have
adversely affected the Company's ability to successfully penetrate potential
customer accounts. See "Risk Factors - Marketing Risks affecting OREX Products"
and "- Competition".
The market for the Company's equipment drapes and fluid control products
is also highly competitive, and is dominated by a few large companies such as
Allegiance, Kimberly-Clark Corporation, Johnson & Johnson and 3M Corporation.
Competition for the Company's safety products includes conventional
methods of handling and disposing of medical waste. Contract waste handlers are
competitors which charge premium rates to remove potentially infectious and
hazardous waste and transport it to an incineration or autoclaving site. Many
hospitals utilize their own incinerators to dispose of this waste. In addition,
systems are available that hospitals can purchase for grinding and chemically
disinfecting medical waste at a central location.
The Company believes that its LTS products command a significant 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".
9
The Company's traditional medical products (including, for example,
equipment drapes), OREX Degradables line of products and SMS products are
regulated by the FDA under medical device provisions of the Federal Food, Drug
and Cosmetic Act (the "FDCA"). FDA regulations classify medical devices into one
of three classes, each involving an increasing degree of regulatory control from
Class I through Class III products. Medical devices in these categories are
subject to regulations which require, among other things, pre-market
notifications or approvals, and adherence to good manufacturing practices,
labeling, record-keeping and registration requirements. Patient care devices
which the Company currently markets are classified as Class I or Class II
devices subject to existing 510(k) clearances which the Company believes satisfy
FDA pre-market notification requirements. The FDA has issued to the Company
510(k) clearances on OREX Degradables products for surgical sponges, operating
room towels, drapes, gowns, surgeon's caps, surgeon's vests, shoe covers and
medical bedding. The Company is currently developing, evaluating and testing
certain OREX Degradables film and thermoformed or extruded OREX products
manufactured from non-PVA polymers, and it is possible that new 510(k)
clearances will be required for such products. There can be no assurances as to
when, or if, other such 510(k) clearances necessary for the Company to market
products developed by it in the future will be issued by the FDA. The FDA
inspects medical device manufacturers and distributors, and has broad authority
to order recalls of medical devices, issue stop sale orders, seize non-complying
medical devices, enjoin violations, impose civil and criminal penalties and
criminally prosecute violators.
The FDA also requires healthcare companies to satisfy record-keeping
requirements and the quality system regulation (QSR) which require that
manufacturers have a quality system for the design and production of medical
devices intended for commercial distribution in the United States. Failure to
comply with applicable regulatory requirements, which may be ambiguous or
unclear, can result in fines, civil and criminal penalties, stop sale orders,
loss or denial of approvals and recalls or seizures of products.
Countries in the European Union require that products being sold within
their jurisdictions obtain a CE mark and be manufactured in compliance with
certain requirements. The Company has CE mark approval to sell its safety and
most of its medical device products in Europe. One of the conditions to
obtaining CE mark status involves the qualification of the Company's
manufacturing plants and corporate offices under certain certification
processes. All of the Company's manufacturing plants and corporate offices have
obtained such certifications, except the domestic manufacturing facilities
acquired from Deka do not hold 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. The Company has altered its
marketing of LTS to comply with EPA's new guidance. In 2000, the Company
obtained registration under FIFRA of a new version of LTS call LTS Plus. The
Company must still seek numerous state and local registrations of such new LTS
Plus products to allow such product to be landfilled in such places. No
assurances can be provided that the Company will obtain such registration or
that prior or continuing sales of the Company's LTS products may not either be
stopped or subject the Company to penalties or other regulatory action. A
product line marketed by a competitor of the Company's LTS products has been
registered under FIFRA, placing LTS at a competitive disadvantage to such
competing product line. See "Risk Factors - Regulatory Risks" and "- Reliance
Upon Distributors".
10
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 various states approval to landfill waste
treated by LTS Plus, and has obtained such approval from several states not
including California. 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.
As the Company seeks to introduce its OREX products to industries other
than healthcare, the Company will be required to satisfy any applicable
regulatory requirements within such industries for the disposal of contaminated
OREX products. While the user of the Company's products and not the Company is
responsible for complying with these legal requirements, the Company's product
development efforts include analyzing compliance programs to facilitate sales of
the Company's products. For example, the Company is currently developing
products and processing technology designed for use in the automotive painting
industry and the nuclear power industry. The processing of OREX materials
contaminated with paint or nuclear outfall is classified as hazardous which
create significant engineering challenges including, for example, a technology
to separate the processed OREX materials from the hazardous component of the
contaminated materials. The Company seeks to work with third parties to develop
technologies to address these challenges. With the help of third parties, the
Company has engineered systems to address these challenges which, based on
preliminary testing, appear to separate the hazardous component of contaminated
OREX material in the processing stage. The Company, however, has not yet begun
commercial sale of these products, which may raise additional challenges as a
part of the Company's efforts to commercialize these technologies.
Regulators at the federal, state and local level have imposed, are
currently considering and are expected to continue to impose regulations on
medical and other waste. No prediction can be made of the potential effect of
any such future regulations, and there can be no assurance that future
legislation or regulations will not increase the costs of the Company's products
or prohibit the sale or use of the Company's products, in either event having an
adverse effect on the Company's business.
Employees
As of December 31, 2000, the Company employed 860 full-time employees,
37 part-time employees and 11 people as independent contractors. Of these, 73
were employed in marketing, sales and customer support, 689 in manufacturing, 23
in research and development, and 122 in administrative positions. The Company
believes its relationship with its employees is good.
Insurance
The Company maintains commercial general liability protection insurance
which provides coverage with respect to product liability claims. The
manufacture and sale of the Company's products entail an inherent risk of
liability. The Company believes that its insurance is adequate in amount and
coverage. There can be no assurance that any future claims will not exceed
applicable insurance coverage. Furthermore, no assurance can be given that such
liability insurance will be available at a reasonable cost or that the Company
will be able to maintain adequate levels of
11
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
History of Net Losses.
While the Company reported net income for the year ended December 31,
1999, the Company has a history of operating at a net loss. For the year ended
December 31, 2000 and for each of the five years ended December 31, 1998, the
Company incurred net losses. The Company attributes such operating performance
in significant part to a failed strategy to commercialize the Company's OREX
Degradables products. The Company has significantly changed its strategy to
commercialize OREX Degradables. The Company sold $1.6 million of OREX
Degradables products in 2000 and did not realize any gross profit on those
sales. Future investments in OREX Degradables products or failed
commercialization strategies could adversely affect operating results in the
future.
Marketing Risks affecting OREX Products.
Isolyser depends entirely on the efforts and success of Allegiance in
marketing OREX Degradables and Enviroguard products to healthcare markets
because Isolyser granted Allegiance an exclusive worldwide license to these
products in healthcare markets. Allegiance has not yet introduced these products
for commercial sale. If Allegiance does not perform in a manner satisfactory to
Isolyser in marketing these products, Isolyser may nevertheless be required to
await the expiration of that license in April, 2003 or later to pursue an
alternative strategy to commercialize these products in healthcare markets.
While Allegiance is a leading supplier of disposable products to the healthcare
industry, the success of OREX products in the healthcare industry will depend
upon numerous factors and is subject to many risks. In January, 2001, the
Company and Allegiance entered into an agreement suspending any purchase
requirements of Allegiance under the Company's license agreement with Allegiance
pending the resolution of certain developmental challenges and a reevaluation of
the terms by which Isolyser and Allegiance might pursue commercialization of
OREX Degradables and Enviroguard products in healthcare markets.
Similarly, developing a market in non-healthcare industries for OREX is
subject to many risks. These risks include:
. Because Isolyser does not currently sell significant quantities
of OREX products, commercialization of these products will
require the purchaser and user of these products to change their
existing purchasing patterns;
. To realize the full benefits of OREX Degradables products, users
of these products will be required to change the way in which
they dispose of these products by incorporating the OREX
dissolution process in disposal procedures;
. Isolyser may experience difficulties in its objective to provide
a regular supply of adequate quantities of product having
uniformly acceptable performance qualities which may cause
Isolyser to lose customers;
. Isolyser will need to provide appropriate regulatory and
mechanical support to customers to incorporate the processing
technology necessary to degrade OREX Degradables products after
use, and Isolyser may not be able to obtain regulatory approvals
or engineer satisfactory processing technology to support
customers;
. Because Isolyser currently has commercially available only a
limited number of OREX Degradables products and therefore cannot
currently replace all traditional disposable products with OREX
12
Degradables, potential customers may not yet justify large-scale
conversion to OREX Degradables products;
. Past concerns with prior OREX Degradables product performance or
future deficiencies in performance of Isolyser's products may
result in the inability to convert new customers to OREX products
or retain existing customers;
. Long term supply contracts entered into by large hospital chains
and smaller collective buying groups, and corresponding customers
in other industries, may prohibit the successful marketing OREX
Degradables to such customers;
. Competitors may try to sell traditional disposable medical
products at prices which prevent the aggressive marketing and
selling OREX Degradables products; and
. Difficulties may be encountered in obtaining regulatory approvals
necessary to process OREX Degradables.
The Company has no significant experience in marketing OREX Degradables
to industries other than healthcare. In evaluating other industries to develop
and market OREX Degradables products, the Company seeks to identify third
parties which the Company believes have expertise or other strategic
characteristics to help commercialize OREX Degradables in that industry.
Contracting with these third parties may require the Company to grant exclusive
rights to the third party over the OREX technology within the applicable
industry. For example, the Company granted to RJ Hanlon exclusive global
distribution rights to covers manufactured from OREX film for robots used in
automotive painting operations. The license is dated June 14, 1999 and has a
term of three years. If the Company is not satisfied with the performance of RJ
Hanlon, the Company may not be able to cancel the agreement. In addition,
marketing of OREX Degradables products in industries other than the healthcare
industry will encounter the same risks described above for the healthcare
industry. Other industries may have special and additional risks, not currently
known to Isolyser. For example, processing of OREX Degradables used in the
automotive paint industry requires special processing to remove paint as paint
is not permitted to flow into municipal sewer systems.
The Company has not been successful to date in its efforts to obtain
substantial acceptance of its OREX Degradables products in their target markets.
There can be no assurance that the Company's products will achieve or maintain
substantial acceptance in their target markets. In addition to market
acceptance, various factors, including delays in improvements to products and
new product development and commercialization, delays in expansion of
manufacturing capability, new product introductions by competitors, price,
competition, delays in regulatory clearances and delays in expansion of sales
and distribution channels could materially adversely affect the Company's
operations and profitability. See "Business - Products and Markets", "-
Marketing and Distribution", and "- Manufacturing and Supplies", and "Risk
Factors - Manufacturing and Supply Risks".
Manufacturing and Supply Risks.
To relieve itself of the overhead burden associated with owning its own
manufacturing facilities, the Company sold its former OREX manufacturing
facilities and now depends entirely upon third parties to manufacture its OREX
Degradables and Enviroguard products. The Company does not have the ability to
manufacture these products. If the Company is not able to obtain its products
from its manufacturers, if such products do not comply with the specifications
or if the prices at which the Company purchases its products are not competitive
with traditional products, the Company's sales and profits will suffer. The
Company's license with Allegiance requires that it sell Enviroguard fabric to
Allegiance at a fixed cost regardless of costs charged to the Company by its
manufacturers.
The cost for OREX raw materials has been high. The raw material
required to manufacture OREX Degradables woven and non-woven products and
Enviroguard is PVA fiber, and the raw material required to manufacture OREX
Degradables film and thermoformed and extruded items is PVA resin and NDP. The
Company obtains its raw materials from various sources but risks exist in
obtaining the quality and quantity of PVA at a price that will allow the Company
to be competitive with manufacturers of conventional disposable and reusable
products. During 1996, an anti-dumping order was issued which requires that
domestic importers of PVA resin post import bonds or pay cash deposits in the
amount of certain scheduled anti-dumping margins ranging from 19% to 116% of the
raw material cost upon importing such raw materials. These payments are not
required for PVA fiber. Such anti-dumping
13
order may have resulted in increases to the Company's cost for raw materials
over that which might otherwise have prevailed. The prices for these raw
materials have affected the ability of the Company to be price competitive with
conventional disposable and reusable products, both reducing sales and adversely
affecting profits.
The Company has entered into a contract requiring that it purchase
certain minimum quantities of PVA fiber at a fixed price over a four year period
expiring in 2002. The total remaining purchase obligation of the Company under
this contract is $926,000. The failure of the Company to sell adequate
quantities of OREX Degradables products could adversely affect the ability of
the Company to satisfy its obligations under this contract, thereby adversely
affecting the Company's operating results.
The Company does not have significant experience obtaining large,
commercial quantities of OREX Degradables and Enviroguard products to meet its
obligations, and the Company's third party manufacturers have not regularly
manufactured these products in the quantities required for commercial sales. The
Company might have difficulties in receiving adequate quantities of products,
receiving such products on schedule and having such products conform with its
requirements. The Company has entered into a contract with the owner of the
Company's former OREX non-woven roll goods manufacturing facility to supply a
thermobonded version of OREX non-woven roll goods, but does not have a contract
for the continuing supply of OREX Degradables towels. The Company has negotiated
a short-term contract for the continued supply of Enviroguard fabrics from one
supplier in China. The Company does not otherwise maintain contracts with its
suppliers for its OREX Degradables and Enviroguard products. To the extent the
Company does not hold a contract for the supply of its products, the Company may
be at a greater risk in obtaining its products and controlling its costs for
products. Production in China and elsewhere outside the United States exposes
the Company to risks related to currency fluctuations, political instability and
other risks inherent in manufacturing in foreign countries. Certain textiles and
similar products for material (including certain OREX Degradables woven
products) imported from China to the United States are subject to import quotas
which restrict total volume of such items available for import by the Company,
creating risks of limited availability and increased costs for certain OREX
Degradables woven products.
The Company's cost to manufacture OREX Degradables products to date
have not been acceptable. See "Risk Factors - History of Net Losses". There can
be no assurances that the Company will be able to reduce its cost to manufacture
such product. In addition, the Company has various obligations to supply OREX
products at a fixed cost regardless of costs incurred by the Company. For
example, the Company's agreement to supply OREX products to Allegiance provides
for a fixed supply cost. To date, the Company has been unable to manufacture
OREX Degradables film and thermoformed and extruded products at an acceptable
cost. The Company has recently begun to develop the use of new polymers, called
NDP, to test manufacture OREX Degradables film and thermoformed and extruded
products. While the Company has undertaken an evaluation of these new products,
no assurances can be provided that the Company will be successful in
manufacturing on a commercial basis OREX Degradables products from these
polymers or that such products will comply with applicable regulatory
requirements.
The Company's products must be manufactured in compliance with FDA and
other regulatory requirements while maintaining product quality at an acceptable
manufacturing cost. There can be no assurance that manufacturing or quality
control problems will not arise at manufacturing plants used to supply the
Company's products, or that the Company's manufacturers will be able to maintain
the necessary licenses from governmental authorities to continue to manufacture
OREX Degradables products.
The Company has from time to time experienced delays in manufacturing
certain OREX Degradables products. The Company has also from time to time
encountered dissatisfaction with certain quality or performance characteristics
of its products. These delays and quality or performance issues have resulted in
the loss of customers. There can be no assurance that future delays or quality
concerns will not occur or that past customer relations on these products will
not adversely affect future customer relations and operating results.
The Company is continually in the process of making improvements to its
technologies and systems for manufacturing its OREX Degradables products, while
simultaneously marketing and supplying various of these products. From time to
time, the Company has invested in inventory of certain OREX Degradables products
which subsequently have been rendered obsolete by improvements in manufacturing
technologies and systems. There can be no assurances that possible future
improvements in manufacturing processes or products will not render other
inventories of product obsolete, thereby adversely affecting the Company's
financial statements.
14
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 Company's patent applications could have a material
adverse effect on the Company and its operations. It is also possible that
competitors will be able to develop materials, processes or products, including
other methods of disposing of contaminated waste, outside the patent protection
the Company has or may obtain, or that such competitors may circumvent, or
successfully challenge the validity of, patents issued to the Company. Although
there is a statutory presumption of a patent's validity, the issuance of a
patent is not conclusive as to its validity or as to the enforceable scope of
the claims of the patent. In the event that another party infringes the
Company's patent or trade secret rights, the enforcement of such right is
generally at the option of the Company and can be a lengthy and costly process,
with no guarantee of success. Further, no assurance can be given that the
Company's other protection strategies such as confidentiality agreements will be
effective in protecting the Company's technologies. Due to such factors, no
assurance can be given that the various components of the Company's technology
protection arrangements utilized by the Company, including its patents, will be
successful in preventing other companies from making products competitive with
those offered by the Company, including OREX Degradables.
Although to date no claims have been brought against the Company
alleging that its technology or products infringe upon the intellectual property
rights of others, there can be no assurance that such claims will not be brought
against the Company in the future, or that any such claims will not be
successful. If such a claim were successful, the Company's business could be
materially adversely affected. In addition to any potential monetary liability
for damages, the Company could be required to obtain a license in order to
continue to manufacture or market the product or products in question or could
be enjoined from making or selling such product or products if such a license
were not made available on acceptable terms. If the Company becomes involved in
such litigation, it may require significant Company resources, which may
materially adversely affect the Company. See "Business - Technology and
Intellectual Property".
Competition.
To date, substantially all of the Company's sales have been to the
healthcare industry. The healthcare industry is highly competitive. There are
many companies engaged in the development, manufacturing and marketing of
products and technologies that are competitive with the Company's products and
technologies. Many such competitors are large companies with significantly
greater financial resources than the Company. Sellers and purchasers of medical
products have undergone consolidations in recent years, resulting in increasing
concentration of the market for disposable medical products with a few companies
and increasing cost pressures. This industry trend may place the Company at a
competitive disadvantage. The Company believes that these trends have adversely
affected the Company's ability to adjust its prices for its OREX Degradables
products to take into account disposal cost savings provided by such products,
in addition to adversely affecting the Company's ability to successfully
penetrate potential customer accounts. The market for disposable medical
products is very large and important to the Company's competitors. Certain of
the Company's competitors serve as the sole distributor of products to a
significant number of hospitals.
15
The Company seeks to sell its OREX Degradables products to industries
other than healthcare, and the Company has virtually no presence in these other
industries at this time. Therefore, the Company will be required to displace
sales of competitive products in these other industries to gain market presence.
There can be no assurance that the Company's competitors will not substantially
increase the resources devoted to the development, manufacturing and marketing
of products competitive with the Company's products. The successful
implementation of such strategy by one or more of the Company's competitors
could have a material adverse effect on the Company. See "Business -
Competition".
Risks of Technological Obsolescence.
Many companies are engaged in the development of products and
technologies to address the need for safe and cost-effective disposal of
potentially infectious and hazardous waste. There can be no assurance that
superior disposal technologies will not be developed or that alternative
approaches will not prove superior to the Company's products. The Company's
products could be rendered obsolete by such developments, which would have a
material adverse effect on the Company's operations and profitability.
Reliance Upon Distributors.
The Company has historically relied on large distributors for the
distribution of its products. Hospitals purchase most of their products from a
few large distributors. Of these distributors, only Allegiance accounted for
more than 10% of the Company's total sales during 2000. If the efforts of the
Company's distributors prove unsuccessful, or if such distributors abandon or
limit their distribution of the Company's products, the Company's sales may be
materially adversely affected. Recent regulatory developments regarding the
Company's LTS products described under "Business - Government Regulation" may
have caused Allegiance to substantially reduce its purchases of the Company's
existing LTS products. The Company believes that Allegiance may have begun to
purchase products competitive with those of LTS manufactured by a third party
which have been registered with the Environmental Protection Agency. Until 1996,
Allegiance was the sole distributor for the Company's LTS products and remains
the most significant distributor of such products. Reduction of such purchases
by Allegiance has had a material adverse effect upon the Company's operating
results. Purchases of all products by Allegiance from Microtek during 2000
represented 16.2% of Microtek's 2000 net sales. The relationships between the
Company and Allegiance with regard to LTS and the Company's infection control
products, as well as the license granted to Allegiance for OREX products, make
the Company substantially dependent upon Allegiance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Regulatory Risks.
The development, manufacture and marketing of the Company's products
are subject to extensive government regulation in the United States by federal,
state and local agencies including the EPA, the FDA and state and local sewage
treatment plants. Similar regulatory agencies exist in other countries with a
wide variety of regulatory review processes and procedures, concerning which the
Company relies to a substantial extent on the experience and expertise of local
product dealers, distributors or agents to ensure compliance with foreign
regulatory requirements. The process of obtaining and maintaining FDA and any
other required regulatory clearances or approvals of the Company's products is
lengthy, expensive and uncertain, and regulatory authorities may delay or
prevent product introductions or require additional tests prior to introduction.
The FDA has issued to the Company 510(k) clearances on OREX Degradables products
for surgical sponges, operating room towels, drapes, gowns, surgeon's caps,
surgeon's vests, shoe covers and medical bedding. The Company is currently
developing, evaluating and testing certain OREX Degradables film and
thermoformed or extruded OREX products manufactured from non-PVA polymers, and
it is possible that new 510(k) clearances will be required for such products.
There can be no assurance as to when, or if, other such 510(k) clearances
necessary for the Company to market products developed by it in the future will
be issued by the FDA. The FDA also requires healthcare companies to satisfy the
quality system regulation. Failure to comply with applicable regulatory
requirements, which may be ambiguous or unclear, can result in fines, civil and
criminal penalties, stop sale orders, loss or denial of approvals and recalls or
seizures of products. There can be no assurance that changes in existing
regulations or the adoption of new regulations will not occur, which could
prevent the Company from obtaining approval for (or delay the approval of)
various products or could affect market demand for the Company's products.
16
Developments regarding the Company's LTS products have had and could
continue to have a material adverse effect upon the Company's operating results.
In November, 1997, the State of California revoked its approval for direct
landfill disposal (without sterilization) of LTS-treated waste within such
state. In February 1998 EPA announced a new policy that FIFRA requires that
products, such as LTS, which hold state approvals related to anti-microbial
efficacy, such as state approvals for landfill of LTS-treated waste, impliedly
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. In 2000, the Company obtained
registration under FIFRA by the EPA of a new version of LTS called LTS Plus. The
Company must still seek numerous state and local registrations of LTS Plus to
allow such product to be landfilled in such places. The EPA's change in policy
could cause the Company to become subject to an order to stop sales of the
original version of LTS or be subject to fines, penalties or other regulatory
enforcement procedures, any one or more of which could have a material adverse
effect on the Company and its results of operations.
Users of OREX Processors may be subject to regulation by local sewage
treatment plants to the extent that discharges from OREX Processors may
interfere with the proper functioning of such plants. In the Company's license
of OREX Degradables products to Allegiance, the Company has agreed to seek
regulatory approval for the disposal of OREX Degradables by the sanitary sewer
systems in the United States and Canada, the European Community countries and
Japan. If Isolyser fails to obtain such approvals within certain specific
territories within certain specified time frames, Allegiance's minimum purchase
obligation under the license will be reduced. The Company has approached
numerous sewage treatment plants requesting their approval to dispose of OREX
Degradables through the municipal sewer system. Although the Company has
obtained a total of over 100 non-binding written and verbal concurrences from
sewage treatment plants, certain of the founder hospitals and other hospitals
who have indicated an interest in purchasing OREX Degradables and an OREX
Processor are located in municipalities where such approvals have not been, and
may never be, obtained. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX products will not interfere with the
proper functioning of sewage treatment plants thereby adversely affecting the
Company's ability to successfully commercialize such newly developing OREX
Degradables technology. There can be no assurance that disposal of OREX
Degradables in areas where these approvals have not been granted will not result
in fines, penalties or other sanctions against product users or adversely affect
market demand for the Company's products.
Introduction of the Company's OREX Degradables products into
non-healthcare industries will require compliance with additional regulatory
requirements. While the Company seeks to engage the services of companies having
expertise in engineering systems to comply with these regulatory requirements,
the Company may not be able to develop satisfactory solutions to regulatory
requirements at an acceptable cost. Until the Company commences commercial sales
of products, the Company may not be able to anticipate all requirements to
successfully commercialize OREX Degradables in these other industries.
Accordingly, no assurances can be provided that OREX Degradables will be an
attractive product to non-healthcare industries.
Environmental Matters.
The Company is subject to various federal, state, local and foreign
environmental laws and regulations governing the discharge, storage, handling
and disposal of a variety of substances and waste used in or generated by the
Company's operations. There can be no assurance that environmental requirements
will not become more stringent in the future or that the Company will not incur
substantial costs in the future to comply with such requirements or that future
acquisitions by the Company will not present potential environmental
liabilities.
Healthcare Reform.
The federal government and the public have focused considerable
attention on reforming the healthcare system in the United States. The Company
cannot predict the healthcare reforms that ultimately may be enacted nor the
effect any such reforms may have on its business. No assurance can be given that
any such reforms will not have a material adverse effect on the Company.
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
17
resulted in injury or other adverse effects, and such claims may involve large
amounts of alleged damages and significant defense costs. Although the Company
currently maintains product liability insurance providing coverage for such
claims, there can be no assurance that the liability limits or the scope of the
Company's insurance policy will be adequate to protect against such potential
claims. In addition, the Company's insurance policies must be renewed annually.
While the Company has been able to obtain product liability insurance in the
past, such insurance varies in cost, is difficult to obtain and may not be
available on commercially reasonable terms in the future, if it is available at
all. A successful claim against the Company in excess of its available insurance
coverage could have a material adverse effect on the Company. In addition, the
Company's business reputation could be adversely affected by product liability
claims, regardless of their merit or eventual outcome. See "Business -
Insurance".
Dependence on Key Personnel.
The Company believes that its ability to succeed will depend to a
significant extent upon the continued services of a limited number of key
personnel, and the ability of the Company to attract and retain key personnel.
The loss of the services of any one or more of these individuals or the failure
to attract and retain such individuals could have a material adverse effect upon
the Company.
Anti-Takeover Provisions.
On December 19, 1996, the Company's Board of Directors adopted a
Shareholder Protection Rights Agreement (the "Rights Agreement"). Under the
Rights Agreement, a dividend of one right ("Right") to purchase a fraction of a
share of a newly created class of preferred stock was declared for each share of
common stock outstanding at the close of business on December 31, 1996. The
Rights, which expire on December 31, 2006, may be exercised only if certain
conditions are met, such as the acquisition (or the announcement of a tender
offer the consummation of which would result in the acquisition) of beneficial
ownership of 15 percent or more of the common stock ("15% Acquisition") of the
Company by a person or affiliated group. The Rights, if exercised, would cause
substantial dilution to a person or group of persons that attempts to acquire
the Company without the prior approval of the Board of Directors. The Board of
Directors may cause the Company to redeem the Rights for nominal consideration,
subject to certain exceptions. The Rights Agreement may discourage or make more
difficult any attempt by a person or group of persons to obtain control of the
Company.
ITEM 2. PROPERTIES
The Company maintains approximately 32,000 square feet of office,
manufacturing, production, research and development and warehouse space located
in Norcross, Georgia under a lease which expires December 30, 2001. The Company
consolidated its administrative offices to this Norcross facility during 1998 in
connection with the sale of its former administrative offices. The Company also
leases from a local economic development authority a 13,300 square foot
administrative building located in Columbus, Mississippi under a lease which
expires December 31, 2007.
The Company conducts its equipment drape and fluid control
manufacturing business from three locations. In Columbus, Mississippi the
Company owns an 80,000 square foot manufacturing building and leases on a
month-to-month basis a 25,000 square foot warehouse facility. The Company leases
four manufacturing facilities totaling 59,000 square feet located in the
Dominican Republic which expire at various dates through 2007. The Company
leases a 43,000 square foot facility located in Empalme, Mexico, where it
manufactures equipment drape and fluid control products. The current lease has
expired on this facility and it is being leased on a month to month basis
through May 2001 when the facility will be closed. The Company leases a 35,000
square foot facility in Tyler, Texas where it manufactures equipment drapes
under a lease which expires July 31, 2002, subject to two renewal options for
five years each. The Company leases a 5,000 square foot manufacturing facility
in Athens, Texas where it manufactures equipment drapes under a lease that
expires on April 1, 2004. The Company also leases a 7,000 square foot
manufacturing and warehouse facility in Waynesville, North Carolina where it
produces prototypes of surgical drapes under a lease that expires on October 1,
2001.
The Company also leases approximately 69,000 square feet of warehouse
and distribution space in Jacksonville, Florida. The Company uses this facility
for distribution of finished products, distribution of materials to the
Company's Dominican Republic facility and light manufacturing under a lease
expiring April 30, 2003.
Through a subsidiary, the Company leases approximately 9,000 square
feet of space near Manchester, England, approximately 7,000 of which is used for
warehouse space and 2,000 of which is used for office space.
18
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, 2000.
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,
1998.
Common Stock
Quarter Ended High Low
------------- ---- ---
2000
First Quarter $6.97 $2.88
Second Quarter $5.47 $3.00
Third Quarter $3.50 $1.88
Fourth Quarter $2.47 $0.50
1999
First Quarter $3.25 $1.06
Second Quarter $5.00 $2.28
Third Quarter $4.94 $3.13
Fourth Quarter $4.00 $2.31
On March 16, 2001, the closing sales price for the common stock as
reported by The Nasdaq Stock Market was $0.875 per share.
As of March 16, 2001, the Company had approximately 18,430
shareholders, including approximately 1,430 shareholders of record and 17,000
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, 2000. In April, 1996,
Microtek purchased the Venodyne division of Advanced Instruments, Inc., and the
Company's results of operations include the results of Venodyne only from the
April 27, 1996 acquisition date. Additionally, during 1999 the Company disposed
of substantially all of the assets of its MedSurg subsidiary and all of its
capital stock in its White Knight subsidiary, and during 1998 the Company
disposed of its Arden and Charlotte, North Carolina and Abbeville, South
Carolina manufacturing facilities, its industrial and Struble & Moffitt
divisions of
19
its White Knight subsidiary, and substantially all of the net assets of its
SafeWaste subsidiary. In October, 2000, Microtek acquired the urology drape
product line of Lingeman Medical Products, Inc. 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, 2000 has been derived from the Company's audited consolidated
financial statements.
Year Ended December 31,
1996 1997 1998 1999 2000
Statement of Operations Data:
(in thousands, except per share data)
Net sales................................... $ 164,906 $ 159,940 $ 147,643 $ 97,554 $ 53,931
Licensing revenues.......................... - - - 1,500 2,433
----------- ------------- -------------- ------------- -------------
Total revenues........................ 164,906 159,940 147,643 99,054 56,364
Cost of goods sold.......................... 128,598 142,094 109,936 61,970 35,938
----------- ------------- -------------- ------------- -------------
Gross Profit.......................... 36,308 17,846 37,707 37,084 20,426
Operating expenses
Selling, general and
administrative........................ 41,381 43,422 40,182 26,596 21,246
Research and development.............. 2,173 2,601 3,906 3,724 4,098
Amortization of intangibles........... 4,290 3,847 2,052 1,440 1,780
Impairment charge..................... - 57,310 7,445 769 -
Restructuring charge.................. 4,410 - - - 1,555
Costs associated with merger.......... 3,372 - - -
Gain on dispositions.................. - - - (628) (21)
----------- ------------- -------------- ------------- -------------
Total operating expenses........... 55,626 107,180 53,585 31,901 28,658
----------- ------------- -------------- ------------- -------------
(Loss) income from operations..... (19,318) (89,334) (15,878) 5,183 (8,232)
Net other income (expense).................. (1,316) (3,415) (3,223) (1,195) (3,755)
----------- ------------- -------------- ------------- -------------
(Loss) income before tax, extraordinary
items and cumulative effect of change
in accounting principle.................. (20,634) (92,749) (19,101) 3,988 (11,987)
Income tax provision (benefit).............. (639) 354 540 1,291 155
----------- ------------- -------------- ------------- -------------
(Loss) income before extraordinary items
and cumulative effect of change in
accounting principle..................... (19,995) (93,103) (19,641) 2,697 (12,142)
Extraordinary items (1)..................... 457 - (1,404) - -
Cumulative effect of change
in accounting principle (2).............. - 800 - - -
----------- ------------- -------------- ------------- -------------
Net (loss) income........................ $ (20,452) $ (93,903) $ (18,237) $ 2,697 $ (12,142)
=========== ============= ============== ============= =============
Net (loss) income per share - Basic and Diluted
(Loss) income before extraordinary
item and cumulative effect of
change in accounting principle........ $ (0.52) $ (2.37) $ (0.49) $ 0.07 $ (0.29)
Extraordinary items................... (0.01) - 0.04 - -
Cumulative effect of change in
accounting principle.................. - (0.02) - - -
----------- ------------- -------------- ------------- -------------
Net (loss) income per share - Basic and
Diluted.................................. $ (0.53) $ (2.39) $ (0.45) $ 0.07 $ (0.29)
=========== ============= ============== ============= =============
Weighted average number of common and
common equivalent shares outstanding
- basic.................................. 38,763 39,273 39,655 40,318 41,269
Weighted average number of common and
common equivalent shares outstanding
- diluted................................ 38,763 39,273 39,655 41,158 43,221
20
(1) Gives effect to the gain from the extinguishment of debt in 1998 and
the loss from refinancing of Isolyser's and Microtek's credit
facilities, net of tax benefits of $332 in 1996.
(2) Reflects the adoption of Emerging Issues Task Force ("EITF") Consensus
No. 97-13, "Accounting for Costs in Connection with a Consulting
Contract or an Internal Process that Combines Processing Reeingineering
and Information Technology Costs Transformation."
Year Ended December 31,
------------------------------------------------------------------------------
1996 1997 (1) 1998 (2) 1999 2000
Balance Sheet Data:
(in thousands)
Working Capital...................... $ 91,962 $ 72,408 $ 39,124 $ 44,090 $ 34,372
Intangible assets, net............... 57,331 30,803 29,128 23,071 23,057
Total assets......................... 250,935 144,334 109,518 95,339 76,969
Long-term debt....................... 47,029 37,546 19,376 4,059 1,673
Total shareholders' equity........... 178,804 86,117 68,675 74,722 63,598
(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.
(2) Pursuant to SFAS No. 121 the Company classified $9.9 million of net
assets related to its White Knight subsidiary and its former
headquarters building as held for sale, and included such amounts in
current assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company was incorporated in 1987 and commenced operations in 1988
with the introduction of its SMS products. In 1990, the Company introduced its
LTS products and thereafter introduced others of its safety products and
services. During 1993, the Company completed the acquisition of two procedure
tray businesses and began to sell standard and custom procedure trays.
On July 1, 1995, Microtek acquired the infection control drape line of
Xomed, in exchange for Microtek's otology product line, thereby providing
Microtek greater concentration on its core business. On September 1, 1995,
Isolyser acquired White Knight and began the conversion manufacturing of
non-woven fabric into finished goods such as drapes and gowns. On November 30,
1995, Microtek acquired Medi-Plast, a manufacturer of equipment drapes.
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. In 2000,
the Company wrote off this investment in its entirety.
On March 31, 1999, the Company disposed of its former corporate
headquarters in Norcross, Georgia. Effective May 31, 1999, the Company disposed
of the stock of its White Knight subsidiary. On July 12, 1999, the Company sold
substantially all of the assets of MedSurg to Allegiance and granted to
Allegiance an exclusive worldwide license to the Company's proprietary
technologies to manufacture, use and sell products made from material which can
be dissolved and disposed of through sanitary sewer systems for healthcare
applications. In October, 2000, Microtek acquired the urology drape product line
of Lingeman Medical Products, a former customer of Microtek.
21
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net revenues for 2000 were $56.4 million compared to $99.1 million for
1999, a decline of 43.1%. Excluding sales of businesses sold during 1999, net
revenues in 2000 decreased 6.7% from net revenues in 1999. Sales of Microtek
products decreased 11.4% to $44.2 million during 2000 as compared to $49.8
million during 1999. This decrease was primarily a result of increased sales in
1999 from a short-term manufacturing contract arrangement with Allegiance.
Excluding this non-recurring business, Microtek sales increased 0.8% from $43.8
million in 1999 to $44.2 million in 2000. Microtek's acquisition of the urology
drape product line of Lingeman Medical Products did not have a material impact
on Microtek's operating results because Lingeman Medical Products was formerly
an OEM private label customer of Microtek. Sales of the Company's safety
products decreased 4.6% from $8.3 million in 1999 to $7.9 million in 2000. This
decrease was due to continuing reduction in purchases of safety products by
Allegiance during 2000.
Included in 2000 revenues are $2.4 million of licensing revenue
associated with the amortization of $10.5 million payment by Allegiance
allocated to the Company's Supply and License Agreement with Allegiance and $1.6
million in sales of OREX and Enviroguard products during 2000. Sales of OREX
Degradables in 2000 did not contribute any gross profit to the Company's
operating results. The license fee amortization was reduced proportionately by
the settlement of indemnification claims by Allegiance and other adjustments
totaling $3.5 million, of which $2.5 million was satisfied by the application of
funds in escrow. The Company's ability to successfully manufacture, supply and
expand its OREX Degradables line of products at acceptable profit margins
remains subject to risks. See "Risk Factors - History of Net Losses", "-
Marketing Risks Affecting OREX Products" and "-Manufacturing and Supply Risks".
During 2000 sales of the Company's safety products continued to be
materially adversely affected by the substantial reduction in purchases of LTS
products by the Allegiance division of Cardinal Healthcare, the largest
distributor of such products, and the previously reported adverse regulatory
developments related to the change in policy by the EPA requiring registration
of the new LTS-Plus product prior to its introduction into the market. This
policy change by EPA also forced the withdrawal of all landfill approvals for
conventional LTS products in mid-1998. LTS-Plus, the new generation treatment
product, has now been registered by the EPA as a treatment for liquid medical
waste and subsequent approvals for direct landfill disposal have been issued by
many states. The Company introduced LTS-Plus into the market during the first
quarter of 2001. See "Risk Factors - Reliance Upon Distributors" and
"-Regulatory Risks".
Gross profit for 2000 was $20.4 million or 36.2% of net revenues
compared to $37.1 million or 37.4% of net revenues in 1999. Excluding gross
profits from the amortization of licensing revenues, gross margin was 33.4% in
2000 as compared to 36.5% in 1999. Included in cost of goods sold in 2000 was a
charge of $3.5 million related to increased reserves for excess and obsolete
OREX inventories, with no similar expense in 1999.
Selling, general and administrative expenses were $21.2 million or
37.7% of net sales in 2000 as compared to $26.6 million or 26.9% of net sales in
1999. This decrease in absolute dollar expenses is due to operations sold during
the year partially offset by a $3.2 million increase in these expenses incurred
by the Company's continuing operations. Expense categories with significant
increases include legal, audit and tax services, consulting and investor
relations. Additionally, the Company incurred higher distribution freight
expense due to rising fuel cost.
Research and development expenses were $4.1 million in 2000 as compared
to $3.7 million in 1999. Included in the increased R&D expenditures were costs
for accelerated development of manufacturing and subsequent fabrication
technologies for the Company's line of Enviroguard products for healthcare. The
Company also experienced unplanned expenditures for the design and development
of its OREX processing units following the default of a vendor for the
fabrication of such units.
Amortization of intangibles was $1.8 million or 3.2% of net sales in
2000. This compares to $1.4 million or 1.5% of net sales in 1999. The increase
in 2000 is primarily due to the write-off of intangibles that related to
operations that were disposed of.
The Company recorded operating expense restructuring charges during
2000 of $1.6 million compared to $769,000 of impairment charges in 1999.
Included in the 2000 charges were severance payments to former officers and
employees, write-offs related to consulting arrangements, write-off of lease
payments for closed offices and the impairment of equipment. The 1999 impairment
charges were attributed to the disposition of the Company's
22
interests in its White Knight subsidiary of $1.6 million partially offset by a
$821,000 adjustment of a previous impairment charge associated with the 1998
sale of its White Knight industrial business.
A loss from operations in 2000 of $8.2 million compares with income
from operations in 1999 of $5.2 million. Without the restructuring charges and
provision for excess and obsolete OREX inventories described above, the Company
would have reported a loss from operations in 2000 of $3.2 million.
Interest income, net of interest expense, in 2000 was $349,000 compared
to net interest expense of $1.2 million in 1999. The decline in interest expense
is primarily attributable to the elimination of the Company's outstanding
balance in its revolver and term loan facility from proceeds of divestitures.
The Company has decided to discontinue additional investment in Thantex
Specialties and has concluded that the recovery of the investment is unlikely.
Accordingly, the investment was written off in 2000.
Provision for income taxes was $155,000 for 2000 compared to $1.3
million in 1999. The 2000 income tax provision is comprised primarily of state
and foreign income taxes.
The resulting net loss for 2000 was $12.1 million compared to net
income of $2.7 million in 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net revenues for 1999 were $99.1 million compared to $147.6 million for
1998, a decline of 32.9%. Excluding sales of businesses sold during 1998 or
1999, net sales in 1999 increased 21.2% over net revenues in 1998. Sales of
Microtek products increased to $49.8 million during 1999 as compared to $42.1
million during 1998, an increase of 18.4%. This increase was primarily a result
of new business from a short-term manufacturing contract arrangement with
Allegiance. Sales of the Company's safety products were 4.3% lower in 1999 than
1998. This decrease was due to continuing reduction in purchases of safety
products by Allegiance during portions of 1998 and 1999.
Included in 1999 revenues are $1.5 million of licensing revenue
associated with the amortization of $10.5 million payment by Allegiance
allocated to the Company's Supply and License Agreement with Allegiance and $1.7
million in sales of OREX Degradables and Enviroguard during 1999. Sales of OREX
Degradables in 1999 did not contribute any gross profits to the Company's
operating results. The Company's ability to successfully manufacture, supply and
expand its OREX Degradables line of products at acceptable profit margins
remains subject to risks. See "Risk Factors - History of Net Losses", "-
Marketing Risks Affecting OREX Products" and "-Manufacturing and Supply Risks".
Gross profit for 1999 was $37.1 million or 37.4% of net revenues
compared to $37.7 million or 25.5% of net revenues in 1998. In June, 1999 the
Company recorded an adjustment to cost of sales and inventory, providing for an
increase in the valuation of inventory and a corresponding reduction in cost of
sales of $1.6 million.
Selling, general and administrative expenses were $26.6 million or
26.9% of net sales in 1999 as compared to $40.2 million or 27.2% of net sales in
1998. This decrease in absolute dollar expenses is due to operations sold during
the year partially offset by a $1.5 million increase in these expenses incurred
by the Company's continuing operations.
Research and development expenses were $3.7 million or 3.8% of net
sales in 1999 as compared to $3.9 million or 2.6% of net sales in 1998. The
Company initiated a re-engineering of the OREX Degradables products in 1998
which was completed in late 1998. The completion of the re-engineering of OREX
to produce Enviroguard in 1998 and reduced costs associated with the development
of a new LTS product accounted for the decline in expenditures in 1999 compared
to 1998.
Amortization of intangibles was $1.4 million or 1.5% of net sales in
1999. This compares to $2.1 million or 1.4% of net sales in 1998. The decrease
in 1999 is primarily due to operations sold during the year.
The Company recorded impairment and other charges during 1999 of
$769,000 compared to $7.4 million of impairment charges in 1998. The 1999
impairment charges were attributed to the disposition of the Company's interests
in its White Knight subsidiary of $1.6 million partially offset by a $821,000
adjustment of a previous
23
impairment charge associated with the 1998 sale of its White Knight industrial
business. 1998 charges related to the disposition of the Company's White Knight
industrial business, and the excess carrying values of the Company's White
Knight subsidiary and the Company's former headquarters over their respective
fair values.
Income from operations in 1999 of $5.2 million compares with a loss
from operations in 1998 of $15.9 million.
Interest expense, net of interest income, in 1999 was $1.2 million
compared to $3.2 million in 1998. The decline is primarily attributable to the
elimination of the Company's outstanding balance in its revolver and term loan
facility from proceeds of divestitures.
Provision for income taxes was $1.3 million for 1999 compared to
$540,000 in 1998. The 1999 income tax provision is comprised primarily of state
and foreign income taxes.
The Company recorded a $1.4 million gain from the extinguishment of
debt during 1998 related to a purchase agreement with a former customer.
The resulting net income for 1999 was $2.7 million compared to a 1998
net loss of $18.2 million.
Liquidity and Capital Resources
As of December 31, 2000, the Company's cash and cash equivalents
totaled $14.4 million compared to $17.0 million at December 31, 1999. As of
December 31, 2000, the Company held a $200,000 escrow deposit included in other
assets which was subsequently used to purchase certain assets of MicroBasix
related to OTI's nuclear business.
During 2000, the Company utilized cash to finance the purchase of a
business, property and equipment, to make scheduled debt repayments related to
previous acquisitions of businesses, equipment and capital leases, and to fund
working capital requirements. For 2000, net cash used in operating activities
was $1.7 million; net cash provided by investing activities was $541,000; and
net cash used in financing activities was $1.3 million. The $1.7 million used in
operating activities in 2000 results principally from the operating loss, but is
offset by significant decreases in inventories and prepaid expenses.
Contributing to the use of cash were the decreases in accounts payable, accrued
compensation and other liabilities. During 2000, cash used in investing
activities included $1.1 million in capital property and equipment expenditures
as compared to $1.3 million in 1999. These expenditures were primarily
associated with investments to improve the Company's internal management
information systems. Also during 2000, the Company purchased a portion of the
assets of Lingeman Medical Products, Inc. for $1.8 million, consisting of $1.1
million in cash and a $675,000 note. The Company also invested $249,000 in
Consolidated EcoProgress and $44,000 in Global Resources, Inc. Cash used in
financing activities was approximately $1.3 million in 2000 as compared to $23.3
million in 1999. In 2000, the Company repaid notes payable totaling $3.1
million. During 1999, the Company repaid all of its outstanding term and
revolver debt. Proceeds from the Company's Employee Stock Purchase Plan, the
401(k) Plan and the exercise of stock options provided the Company $2.0 million
in 2000. During 2000, the Company repurchased 496,000 shares of common stock
through open market and private transactions for an aggregate of $898,000.
The Company maintains a $10.0 million credit agreement (as amended to
date, the "Credit Agreement") with The Chase Manhattan Bank (the "Bank"),
consisting of a revolving credit facility maturing on June 30, 2001. Borrowing
availability under the revolving credit facility is based on the lesser of (i) a
percentage of eligible accounts receivable and inventory or (ii) $10.0 million,
less any outstanding letters of credit issued under the Credit Agreement.
Current borrowing availability under the revolving facility at December 31, 2000
was $10.0 million. Revolving credit borrowings bear interest, at the Company's
option, at either a floating rate approximating the Bank's prime rate plus an
interest margin, as defined, or LIBOR plus an interest margin (8.5% at December
31, 2000). There were no outstanding borrowings under the revolving credit
facility at December 31, 2000. On March 9, 2001, the Credit Agreement was
amended to provide for an increase in the revolving facility to $13.0 million
until April 30, 2001. During this period, borrowings will bear interest at a
floating rate of approximating the Bank's prime rate plus an interest margin
which totaled 10.0% at March 16, 2001. On March 16, 2001, outstanding borrowings
under the revolving credit facility were $6.4 million and borrowing availability
was $6.6 million. The Credit Agreement provides for the issuance of up to $1.0
million in letters of credit. There were no outstanding letters of credit at
December 31, 2000. The Credit Agreement provides for a fee of 0.50% per annum on
the unused
24
commitment, an annual collateral monitoring fee of $25,000, and an outstanding
letter of credit fee of 2.0% per annum. Borrowings under the Credit Agreement
are collateralized by the Company's accounts receivable, inventory, equipment,
Isolyser's stock of its subsidiaries and certain of the Company's plants and
offices. The Credit Agreement contains certain restrictive covenants, including
the maintenance of certain financial ratios and earnings, and limitations on
acquisitions, dispositions, capital expenditures and additional indebtedness.
The Company also is not permitted to pay any dividends. At December 31, 2000 the
Company was in violation of certain financial covenants, but has obtained a
waiver from the Bank of such non-compliance.
During 2000, the Company had adequate cash and cash equivalents to fund
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.
Based on its current business plan, the Company currently expects that
cash equivalents and short term investments on hand, the Company's existing
credit facility and funds budgeted to be generated from operations will be
adequate to meet its liquidity and capital requirements through 2001. However,
currently unforeseen future developments and increased working capital
requirements may require additional debt financing or issuances of common stock
in 2001 and subsequent years.
Inflation and Foreign Currency Translation. Inflation has not had a
material effect on the Company's operations. If inflation increases, the Company
will attempt to increase its prices to offset its increased expenses. No
assurance can be given, however, that the Company will be able to adequately
increase its prices in response to inflation.
The assets and liabilities of the Company's United Kingdom subsidiary
are translated into U.S. dollars at current exchange rates and revenues and
expenses are translated at average exchange rates. The effect of foreign
currency transactions was not material to the Company's results of operations
for the year ended December 31, 2000. Export sales by the Company during 2000
were $5.7 million. Currency translations on export sales could be adversely
affected in the future by the relationship of the U.S. Dollar with foreign
currencies. In the future, the Company may import significant amounts of
products from foreign manufacturers, exposing the Company to risks on
fluctuations in currency exchange rates.
Newly Issued Accounting Standards. In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and
138, which provide a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. Upon adoption, all
derivative instruments will be recognized in the balance sheet at fair value,
and changes in the fair values of such instruments must be recognized currently
in earnings unless specific hedge accounting criteria are met. The adoption of
these pronouncements on January 1, 2001 did not have a material effect on the
Company's financial position.
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 capital expenditure requirements, cash and working
capital requirements, the Company's expectations regarding the adequacy of
current financing arrangements 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, product liability and other risks described in
this Annual Report on Form 10-K. See "Business - Risk Factors".
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operating results and cash flows are subject to
fluctuations from changes in interest rates and foreign currency exchange rates.
The Company's cash and cash equivalents are short-term, highly liquid
investments with original maturities of three months or less consisting entirely
of U.S. Government securities or government backed securities. These investments
are classified in accordance with SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, as available for sale securities and are stated
at cost, which approximates market. As a result of the short-term nature of the
Company's cash and cash equivalents, a change of market interest rates does not
impact the Company's operating results or cash flow.
The assets and liabilities of the Company's United Kingdom subsidiary
are translated into U.S. dollars at current exchange rates and revenues and
expenses are translated at average exchange rates. The effect of foreign
currency translations was not material to the Company's results of operations
for the year ended December 31, 2000. Currency translations on export sales or
import purchases could be adversely effected in the future by the relationship
of the U.S. dollar with foreign currencies.
The Company's greatest sensitivity with respect to market risk is to
changes in the general level of U.S. interest rates and its effect upon the
Company's interest expense. At December 31, 2000, the Company had long-term debt
totaling $675,000 that bears interest at the Prime Rate. Because this rate is
variable, an increase in interest rates would result in additional interest
expense and a reduction in interest rates would result in reduced interest
expense.
The Company does not use any derivative instruments to hedge its
interest rate expense. The Company does not use derivative instruments for
trading purposes and the use of such instruments would be subject to strict
approvals by the Company's senior officers. Therefore, the Company's exposure
related to such derivative instruments is not expected to be material to the
Company's financial position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are listed
under Item 14(a) and filed as part of this report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
Effective December 1, 2000, the Company promoted Dan Lee and Jerry
Wilson to the offices of President and Chief Financial Officer, respectively,
following the elimination of the positions of Migo Nalbantyan and Jim Rushing,
the former President and Chief Financial Officer of the Company who resigned.
The Company implemented these changes in part to reduce operating expenses and
increase the Company's focus on its core businesses to improve operating
results.
The current directors and executive officers of the Company are as
follows:
Name Position
---- --------
Gene R. McGrevin Chairman of the Board of Directors
Dan R. Lee President and Chief Executive Officer, Director
Michael Mabry Executive Vice President and Secretary
26
Name Position
---- --------
Donald E. McLemore Executive Vice President
R.G. "Jerry" Wilson Chief Financial Officer and Assistant Secretary
Travis W. Honeycutt Director
Rosdon Hendrix Director
Kenneth F. Davis Director
John E. McKinley Director
Ronald L. Smorada Director
Gene R. McGrevin (age 58) 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 served as chairman of P.E.T.Net
Pharmaceutical Services, LLC, a manufacturer and distributor of
radiopharmaceuticals, from May 1997 until January 2001 and is currently a
consultant for P.E.T.Net. Mr. McGrevin previously served as Vice Chairman and
Chief Executive Officer of Syncor International Corp., a public company in the
nuclear medicine industry, with which Mr. McGrevin was associated since 1989.
Prior to managing Syncor, Mr. McGrevin served in executive positions with
various healthcare businesses including President of the Healthcare Products
Group of Kimberly-Clark Corporation, founder and President of a consulting firm
specializing in the healthcare industry and an executive officer of VHA
Enterprises, Inc.
Dan R. Lee (age 53) was elected to serve as President and Chief
Executive Officer of the Company in December 2000, in addition to continuing his
role as the President of Microtek Medical, Inc., a subsidiary of Isolyser. He
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.
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.
R. G. "Jerry" Wilson (age 56) was elected Chief Financial Officer,
Treasurer and Assistant Secretary of the Company in December 2000 in addition to
serving since December 1999 in the position of Vice President and Chief
Financial Officer of Microtek. Mr. Wilson served as Vice President of Finance
for the White Knight Healthcare subsidiary after its acquisition by Isolyser in
1995. Prior to accepting such positions, Mr. Wilson had served as corporate
controller of White Knight Healthcare, Inc. since 1987. Mr. Wilson was also
employed by Akzo America, Inc. for twelve years in various accounting and income
tax management positions. Prior to that, Mr. Wilson, who is a Certified Public
Accountant, practiced public accounting for seven years.
Michael Mabry (age 38) was elected Executive Vice President in October
1998 after serving as Vice President of Operations of the Company since May
1997. Additionally, he serves as Chief Executive Officer of MindHarbor, a
technology services provider, and as Chief Executive Officer of Global
Resources, Inc. ("GRI"), a material sourcing company. Prior to accepting the
position of Executive Vice President, 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. He also serves as Secretary of the Company.
Donald "Don" E. McLemore, Ph.D. (age 50) was elected Executive Vice
President in December 2000 and President of Orex Technology International, a
division of Isolyser, in April 2000. Dr. McLemore served as Vice President of
Research and Development for the Company from September 1999 until April 2000.
Dr. McLemore joined Isolyser from Raychem Corporation, where was Director of
Technology and Business Development for the OEM Electronics Division.
Previously, Dr. McLemore was with Dow Chemical Company ("Dow") for 21 years,
holding positions with increasing levels of responsibility for Research and
Development management, including Director of Technology and Business
Development in Dow's New Business unit.
27
Travis W. Honeycutt (age 58) served as Executive Vice President,
Secretary and a Director of the Company since its inception in 1987 and until
his retirement as an employee in 1999. Mr. Honeycutt remains a Director of
Isolyser. Mr. Honeycutt has authored or co-authored over 200 domestic and
international patents, 50 of which related to polyvinyl alcohol and its
derivations. Prior to his co-founding the Company in 1987, Mr. Honeycutt had
over 20 years of experience in new product development for the industrial and
healthcare markets.
Rosdon Hendrix (age 61) was elected a Director of the Company in
December 1994. Until he retired in June 1992, Mr. Hendrix served for
approximately 30 years in various financial positions for General Motors
Corporation, including serving as Resident Comptroller from 1975 until his
retirement. Since June 1992, Mr. Hendrix has engaged in efficiency consulting
studies with various governmental authorities and businesses in Georgia.
Kenneth F. Davis (age 49) was elected a Director of the Company in
January 1996. Dr. Davis has been a practicing surgeon on the staff of the Harbin
Clinic and Redmond Regional Medical Center, Rome, Georgia since 1986. In
addition, Dr. Davis serves on the Board of AmSouth Bank of Georgia, a publicly
owned bank, as well as various other companies, including a privately held
hospital consulting firm.
John E. McKinley (age 57) was elected a Director of the Company in May
1998. Between 1991 and 1996, Mr. McKinley was the principal operating officer of
BankSouth Corporation, Atlanta, Georgia, where he was a Board member and
Chairman of the Credit Policy Committee. Mr. McKinley also headed the Management
Committee of Bank South, which included direct responsibility for credit policy,
business banking and mortgage banking. From 1969 to 1991, Mr. McKinley worked
with Citizens and Southern National Bank and C&S/Sovran where he was the chief
credit officer of C&S Georgia Corporation and a senior vice president.
Additionally, Mr. McKinley has taught in numerous banking schools and has
authored or co-authored numerous books and articles on banking. Since 1996, Mr.
McKinley has been engaged in private consulting services. Mr. McKinley also
serves as a director of Inficorp Holdings, Inc.
Ronald L. Smorada (age 54) was elected a Director of the Company in May
1999. During the past five years, Dr. Smorada has been an active participant in
the nonwovens industry holding senior management positions at Reemay, Fiberweb
and BBA US Holdings, the latter being the parent of the former two, with
nonwoven sales in excess of $800 million. Dr. Smorada worked in the development,
acquisition and integration of new and existing businesses, both domestic and
international. A major focus for him has been the application and conversion of
science and technical concepts into meaningful businesses.
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.
28
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 2000, 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 Dr. Davis and Mr. Honeycutt each reported exempt sales of
shares late, and Dr. McLemore and Mr. Creizman each filed their Form 3s late.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation paid
by the Company to the Company's chief executive officer and former chief
executive officer, and each of the four most highly compensated executive
officers of the Company serving at December 31, 2000 other than such chief
executive officer, and one other executive officer of the Company during 2000
not serving as such at December 31, 2000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
---------------------------------------- Compensation
Other Annual Awards All Other
Name and Principal Position Year Salary Bonus Compensation Options (#) Compensation
--------------------------- ---- ------ ----- ------------ ----------- -------------
Dan R. Lee 2000 $174,634 $53,813 - 50,000 $ 11,894(1)
President and Chief Executive 1999 $162,000 $127,044 - 35,081 $ 7,319(2)
Officer 1998 $150,000 - - 122,368 $ 5,133(3)
Migirdic Nalbantyan 2000 $250,288 - - - $ 9,170(4)
Former President and Chief 1999 $181,154 $185,400 - 250,000 $130,899(5)
Executive Officer 1998 $127,112(6) - - 400,000 $ 2,077(7)
James C. Rushing, III 2000 $146,538 - - - $ 4,910(8)
Former Executive Vice President 1999 $ 97,923 $80,000 - 80,000 $ 319(10)
and Chief Financial Officer 1998 $ 10,000(9) - - 20,000 -
Michael Mabry 2000 $162,500 $ 8,250 - - $ 9,804(11)
Executive Vice President and 1999 $152,885 $130,800 - 150,000 $ 5,968(12)
Secretary 1998 $130,981 - - 150,000 $ 4,495(13)
Donald E. McLemore 2000 $146,538 $ 8,250 - 145,000 $ 27,734(14)
Executive Vice President 1999 $ 39,000(15) - - 25,000 $ 2,251(16)
2000 $121,539 $25,625 - 25,000 $ 5,120(17)
R.G. Wilson 1999 $102,809 $44,167 - 5,000 $ 4,104(18)
Chief Financial Officer 1998 $ 86,931 $89,375 - 20,000 $ 283(19)
(1) This amount represents $6,985 in contributions to a 401(k) plan, $2,036
for a $250,000 term life insurance policy, $138 for $100,000 of term
life insurance and a $6,000 automobile allowance.
(2) This amount represents $5,070 in contributions to a 401(k) plan, $2,036
for a $250,000 term life insurance policy and $213 for a $50,000 term
life insurance policy.
(3) This amount represents a $2,036 payment for a $250,000 term life
insurance policy and contributions for a 401(k) plan for the balance of
the amount stated.
29
(4) This amount represents $8,912 in contributions to a 401(k) plan and
$258 for a $100,000 term life insurance policy.
(5) This amount represents $124,337 in reimbursements paid for relocation
of residence, $6,208 in contribution to a 401(k) plan and $354 for
$100,000 of term life insurance.
(6) This amount represents compensation paid from February 1, 1998, the
date Mr. Nalbantyan became an employee of the Company.
(7) This amount represents contributions to a 401(k) plan.
(8) This amount represents $258 for a $100,000 term life insurance policy
and $4,652 in reimbursements paid for relocation of residence.
(9) This amount represents compensation paid from December 16, 1998, the
date Mr. Rushing became an employee of the Company.
(10) This amount represents premiums for a $95,000 term life insurance
policy.
(11) This amount represents $9,750 in contribution to a 401(k) plan and $54
for a $100,000 term life insurance policy.
(12) This amount represents $5,908 in contribution to a 401(k) plan and $60
for a $100,000 term life insurance policy.
(13) This amount represents $4,429 in contributions to a 401(k) plan and $66
for a $100,000 term life insurance policy.
(14) This amount represents $18,804 in reimbursements paid for relocation of
residence, $8,792 in contribution to a 401(k) plan and $138 for a
$100,000 term life insurance policy.
(15) This amount represents compensation paid from September 8, 1999, the
date Dr. McLemore became an employee of the Company.
(16) This amount represents $2,251 in reimbursements paid for relocation of
residence.
(17) This amount represents $4,862 in contribution to a 401(k) plan and $258
for a $100,000 term life insurance policy.
(18) This amount represents $4,104 in contribution to a 401(k) plan.
(19) This amount represents $283 for a $50,000 term life insurance policy.
Employment Arrangements
Messrs. Lee and McLemore are not parties to employment agreements with
the Company.
In connection with their respective resignations from their offices
with the Company effective November 30, 2000, Messrs. Nalbantyan and Rushing
entered into severance agreements in which, among other things, they ratified
and confirmed the protective covenants contained in their respective employment
agreements including covenants relating to the protection of confidential
information and restricting competition against the Company. The Company agreed
to continue their respective salaries for the last month of 2000, and pay a lump
sum severance at the beginning of 2001 in an amount equal to their respective
salaries, pay the premiums for continued group health insurance coverage for up
to six months, and the vesting of a portion of their respective stock options
and the allowance of one year following the date of their resignation to
exercise such stock options.
Mr. Mabry is a party to a three year employment agreement with the
Company which commenced July 1, 2000. Such employment agreement specifies a
minimum salary and benefits payable during the term of the employment agreement,
and contains certain restrictive covenants including covenants relating to the
protection of confidential information and restricting competition against the
Company. The agreement is terminable by the Company or the employee with or
without cause. In the event of a termination of the agreement by the Company
without cause, or by the employee for good reason (as defined), the employee
would generally be entitled to one year of salary as severance. In the event of
any termination of the employee's employment following a change in control (as
defined) of the Company, other than a termination of employment as a result of
death or disability, then the Company is obligated to pay a severance amount
equal to the employee's annual base salary as then in effect.
30
Mr. Wilson is a party to an employment agreement with Microtek under
which he agreed to continue to serve as an employee until March 31, 2002, and
which specifies a certain minimum salary and benefits. The agreement also
includes certain restrictive covenants including covenants relating to the
protection of confidential information. The agreement is terminable by the
Company with or without cause. In the event of any termination of Mr. Wilson's
employment by the Company without cause, it is obligated to pay the base salary
provided in the agreement through the expiration of the agreement.
Employee Benefit Plans
1992 Stock Option Plan. In April 1992, the Board of Directors and
shareholders of the Company adopted a Stock Option Plan (the "1992 Stock Option
Plan"). The 1992 Stock Option Plan provides for the issuance of options to
purchase up to 4,800,000 shares of common stock (subject to appropriate
adjustments in the event of stock splits, stock dividends and similar dilutive
events). Options may be granted under the 1992 Stock Option Plan to employees,
officers or directors of, and consultants and advisors to, the Company who, in
the opinion of the Compensation Committee, are in a position to contribute
materially to the Company's continued growth and development and to its
long-term financial success. The 1992 Stock Option Plan is administered by a
committee appointed by the Board of Directors. The Compensation Committee has
been designated by the Board of Directors as the committee to administer the
1992 Stock Option Plan. The purposes of the 1992 Stock Option Plan are to ensure
the retention of existing executive personnel, key employees and consultants of
the Company, to attract and retain new executive personnel, key employees and
consultants and to provide additional incentives by permitting such individuals
to participate in the ownership of the Company.
Options granted to employees may either be incentive stock options (as
defined in the Internal Revenue Code (the "Code")) or nonqualified stock
options. The exercise price of the options shall be determined by the Board of
Directors or the committee at the time of grant, provided that the exercise
price may not be less than the fair market value of the Company's common stock
on the date of grant as determined in accordance with the limitations set forth
in the Code. The terms of each option and the period over which it vests are
determined by the committee, although no option may be exercised more than ten
years after the date of grant and all options become exercisable upon certain
events defined to constitute a change of control. To the extent that the
aggregate fair market value, as of the date of grant, of shares with respect to
which incentive stock options become exercisable for the first time by an
optionee during the calendar year exceeds $100,000, the portion of such option
which is in excess of the $100,000 limitation will be treated as a nonqualified
stock option. In addition, if an optionee owns more than 10% of the total voting
power of all classes of the Company's stock at the time the individual is
granted an incentive stock option, the purchase price per share cannot be less
than 110% of the fair market value on the date of grant and the term of the
incentive stock option cannot exceed five years from the date of grant. Upon the
exercise of an option, payment may be made by cash, check or, if provided in the
option agreement, by delivery of shares of the Company's common stock having a
fair market value equal to the exercise price of the options, or any other means
that the Board or the committee determines. Options are non-transferable during
the life of the option holder. The 1992 Stock Option Plan also permits the grant
of alternate rights defined as the right to receive an amount of cash or shares
of common stock having an aggregate fair market value equal to the appreciation
in the fair market value of a stated number of shares of common stock from the
grant date to the date of exercise. No alternate rights have been granted under
the 1992 Stock Option Plan.
As of March 16, 2001, options to purchase 2,148,896 shares of common
stock were outstanding under the 1992 Stock Option Plan and approximately
569,028 shares of common stock were available for future awards under that Plan.
1999 Stock Option Plan. In March 1999 the Board approved and in May
1999 the Company's shareholders ratified, the adoption of the Company's 1999
Long-Term Incentive Plan (the "1999 Stock Option Plan"). The 1999
31
Stock Option Plan currently provides for the issuance of options and other stock
awards to acquire shares of common stock up to a maximum of 1,200,000 shares
(subject to appropriate adjustment in the event of stock splits, stock dividends
and other similar dilutive events). Options and other stock awards may be
granted under the 1999 Stock Option Plan to employees of the Company and certain
subsidiaries and affiliated businesses, and to directors, consultants and other
persons providing key services to the Company.
The Compensation Committee of the Board of Directors will determine the
terms and conditions of options granted under the 1999 Stock Option Plan,
including the exercise price, which generally may not be less than the fair
market value of the Company's common stock on the date of grant. Awards under
the 1999 Stock Option Plan may be settled through cash payments, the delivery of
shares of common stock, or a combination thereof as the Committee shall
determine. Stock options awarded under the 1999 Stock Option Plan which are
intended to be incentive stock options are subject to the same restrictions
described above with respect to the 1992 Stock Option Plan.
The 1999 Stock Option Plan may be terminated or amended by the Board of
Directors at any time, except that the following actions may not be taken
without shareholder approval: (a) increasing the number of shares that may be
issued under the 1999 Stock Option Plan (except for certain adjustments provided
for under the 1999 Stock Option Plan), or (b) amending the 1999 Stock Option
Plan provisions regarding the limitations on the exercise price. In the event of
a change of control (as defined generally to include the acquisition by an
individual, entity or group of more than 15% of the outstanding common stock of
the Company, a merger or consolidation of the Company or a sale by the Company
of all or substantially all of the Company's assets), any award granted under
the 1999 Stock Option Plan shall become exercisable except to the extent (a) the
award otherwise provides or (b) the exerciseability of such award will result in
an "excess parachute payment" within the meaning of the Code. The 1999 Stock
Option Plan is unlimited in duration and, in the event of 1999 Stock Option Plan
termination, shall remain in effect as long as any awards under it are
outstanding, except no incentive stock options may be granted under the 1999
Stock Option Plan on a date that is more than ten years from the date the 1999
Stock Option Plan is approved by shareholders. Each option expires on the date
established by the Compensation Committee at the time of the grant, except the
expiration cannot be later than the earliest of ten years from the date on which
the option was granted, if the participant's date of termination occurs for
reasons other than retirement or early retirement, the one year anniversary of
such date of termination, or if the participant's date of termination occurs by
reason of retirement or early retirement, the three year anniversary of such
date of termination.
As of March 16, 2001, options to purchase 740,500 shares of common
stock were outstanding under the 1999 Stock Option Plan and approximately
459,500 shares of common stock were available for future awards under the 1999
Stock Option Plan.
Employee Stock Purchase Plan. In March 1999 the Board approved and in
May 1999 the Company's shareholders ratified, the adoption of the Company's
Employee Stock Purchase Plan for employees of the Company and its subsidiaries
(the "1999 Stock Purchase Plan"). The 1999 Stock Purchase Plan was established
pursuant to the provisions of Section 423 of the Code to provide a method
whereby all eligible employees of the Company may acquire a proprietary interest
in the Company through the purchase of common stock. Under the 1999 Stock
Purchase Plan payroll deductions are used to purchase the Company's common
stock. An aggregate of 700,000 shares of common stock of the Company were
reserved for issuance under the 1999 Stock Purchase Plan.
Stock Options
The Company granted options to its Named Executive Officers in 2000 as
set forth in the following table. The Company has no stock appreciation rights
("SARs") outstanding.
32
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
----------------------------------------------------------
Percent of Potential Realizable Value at
Number of Total Assumed Annual rates of Stock
Securities Options/SARs Price Appreciation for Option
Underlying Granted to Exercise or Term/(1)/
Options/SARs Employees in Base Price Expiration --------------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
----------------------------------- -------------- ----------- ------------ --------------- ---------------
Dan R. Lee 50,000 8.4% $1.1875 11/30/10 $ 37,341 $ 94,628
Migirdic Nalbantyan - - - - - -
James C. Rushing, III - - - - - -
Michael Mabry - - - - - -
Donald E. McLemore 10,000 1.7% $ 4.188 5/17/10 $ 26,338 $ 66,746
135,000 22.6% $ 2.25 8/9/10 $191,027 $484,099
R. G. Wilson 25,000 4.2% $1.1875 11/30/10 $ 18,670 $ 47,314
- ------------------
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall market conditions.
The following table sets forth the value of options exercised during 2000
and of unexercised options held by the Company's Named Executive Officers
at December 31, 2000.
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
---- --------------- ------------ ------------- -------------
Dan R. Lee 251,295 $288,703 172,394/76,311 $0/$0 (1)
Migirdic Nalbantyan - - 262,500/162,500 $0/$0 (2)
James C. Rushing, III - - 30,000/20,000 $0/$0 (3)
Mike Mabry 29,475 $38,686 119,143/151,382 $0/$0 (4)
Donald E. McLemore - - 6,250/145,000 $0/$0 (5)
R. G. Wilson 19,738 $34,138 6,250/38,750 $0/$0 (6)
- -------------------------
(1) The indicated value is based on exercise prices ranging from $2.125 to
$3.49 per share on 172,394 exercisable options and exercise prices
ranging from $1.1875 to $2.125 on 76,311 unexercisable options, and a
value per share on December 29, 2000 of $1.00.
33
(2) The indicated value is based on exercise prices ranging from $1.25 to
$2.6875 per share on 262,500 exercisable options and exercise prices
ranging from $1.25 to $2.6875 on 162,500 unexercisable options, and a
value per share on December 29, 2000 of $1.00.
(3) The indicated value is based on exercise prices ranging from $1.094 to
$2.813 per share on 30,000 exercisable options and exercise prices
ranging from $2.125 to $2.813 on 20,000 unexercisable options, and a
value per share on December 29, 2000 of $1.00.
(4) The indicated value is based on exercise prices ranging from $1.25 to
$3.375 per share on 119,143 exercisable options and exercise prices
ranging from $1.25 to $2.2813 on 151,382 unexercisable options, and a
value per share on December 29, 2000 of $1.00.
(5) The indicated value is based on an exercise price of $2.813 per share
on 6,250 exercisable options and exercise prices ranging from $2.25 to
$4.188 on 145,000 unexercisable options, and a value per share on
December 29, 2000 of $1.00.
(6) The indicated value is based on exercise prices ranging from $2.125 to
$2.2813 per share on 6,250 exercisable options and exercise prices
ranging from $1.1875 to $2.2813 on 38,750 unexercisable options, and a
value per share on December 29, 2000 of $1.00.
Director Compensation
In consideration of Mr. McGrevin's agreement to serve as Chairman effective
upon the immediately preceding Chairman's resignation, the Chairman receives a
retainer at the rate of $100,000 for the period beginning December 1, 2000
through June 30, 2001.
The other directors who are not also employees of the Company ("Nonemployee
Directors") receive a retainer of $10,000 per year payable in a lump sum
following each annual meeting of shareholders. No meeting fees are payable to
the Nonemployee Directors. Nonemployee Directors are reimbursed upon request for
reasonable expenses incurred in attending Board of Director or committee
meetings.
At each regular annual meeting of shareholders, the Company grants to each
Nonemployee Director a non-qualified stock option covering 5,000 shares of
common stock (except that such stock option covers 25,000 shares of common stock
for Nonemployee Directors upon their initial election as a director of the
Company) at an exercise price equal to the fair market value of the Company's
common stock on such date of grant. These option grants may be exercised only by
the optionee until the earlier of five years after the date of grant or one year
after ceasing to be a director of the Company.
In addition to the foregoing, during 2000 the Company paid Mr. McGrevin
$20,000 in consideration of his services as Chairman during the period from
January 1, 2000 through May 18, 2000. In consideration of special services
provided by the following directors either as chairman of committees of the
Board or for other services, the Company granted stock options to the following
directors with each of such stock options having an exercise price equal to the
fair market value of the Company's common stock on the date of grant, and being
exercisable only by the optionee until the earlier of five (5) years after the
date of grant or one (1) year after ceasing to be a director of the Company:
Name Number of Shares Exercise Price
---- ---------------- --------------
Rosdon Hendrix 20,000 $ 2.25
Gene McGrevin 150,000 $1.1875
John McKinley 10,000 $1.1875
Ronald L. Smorada 10,000 $ 2.25
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 16, 2001, 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
Shares Beneficially Stock Beneficially
Name of Beneficial Owner Owned Owned
- ------------------------ ----- -----
Travis W. Honeycutt (1) 2,188,722 5.3%
Gene R. McGrevin (2) 440,000 1.0%
Dan R. Lee (3) 211,231 *
Rosdon Hendrix (4) 149,000 *
Kenneth Davis (5) 122,243 *
John E. McKinley (6) 175,000 *
Ronald L. Smorada (7) 50,000 *
Mike Mabry (8) 166,968 *
Donald E. McLemore (9) 10,750 *
R. G. Wilson (10) 22,500 *
Migirdic Nalbantyan (11) 361,000 *
James C. Rushing, III (12) 31,250 *
Dimensional Fund Advisors, Inc. (13) 2,690,970 6.5%
All directors and executive officers as a group (10 persons) (14) 3,496,414 8.2%
- ------------------
* Represents less than 1% of the common stock
(1) Includes options to acquire 5,000 shares exercisable within 60 days.
(2) Includes options to acquire 400,000 shares exercisable within 60 days.
(3) Includes options to acquire 181,166 shares exercisable within 60 days.
(4) Includes options to acquire 119,000 shares exercisable within 60 days.
(5) Includes options to acquire 97,000 shares exercisable within 60 days.
(6) Includes options to acquire 55,000 shares exercisable within 60 days.
(7) Includes options to acquire 50,000 shares exercisable within 60 days.
(8) Includes options to acquire 156,644 shares exercisable within 60 days.
(9) Includes options to acquire 8,750 shares exercisable within 60 days.
(10) Includes options to acquire 12,500 shares exercisable within 60 days.
(11) Includes options to acquire 262,500 shares exercisable within 60 days and
1,000 shares owned by a family member.
(12) Includes options to acquire 31,250 shares exercisable within 60 days.
(13) 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, 11/th/ Floor, Santa Monica,
California 90401.
(14) Includes options to acquire 1,085,060 shares exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January, 2000, the Company formed MindHarbor, Inc., as a wholly owned
subsidiary of the Company. The Company contributed to MindHarbor computer
equipment and software having a net book value of approximately $61,000 and
loaned $150,000 to MindHarbor which is repayable in accordance with a Promissory
Note (the "MindHarbor Note") accruing interest at six percent (6%) and maturing
on January 1, 2003. MindHarbor was formed as a part of a long-term strategy to
outsource the Company's telecommunication management, computer support and
maintenance, and network support and management services. To implement this
long-term objective, the Company entered into a Services Agreement with
MindHarbor under which MindHarbor agreed to provide these services to the
Company for a minimum of two (2) years for a fee equal to the cost of providing
such services. These costs include third-party out-of-pocket expenses and the
salary and benefits of the Company personnel transferred to MindHarbor. The
Company agreed to provide general office services to MindHarbor at no cost so
long as the
35
Company shared common office facilities with MindHarbor. Mike Mabry, an
executive officer of the Company, is a director and the chief executive officer
of MindHarbor. Unless the Services Agreement is otherwise amended by Isolyser,
the Services Agreement provides for the transfer of 75% of the ownership
interest in MindHarbor to the three members of the Board of Directors of
MindHarbor (of which Mike Mabry would participate to the extent of 23%) to the
extent that the MindHarbor note is retired prior to its maturity date. During
2000, the Company paid $492,000 to MindHarbor for services rendered and expenses
incurred by MindHarbor for the benefit of the Company.
In May, 2000, the Company and certain of its affiliates and employees
organized Global Resources, Inc. Global Resources provides supply-chain
management and material sourcing services for product in China. Isolyser, Mike
Mabry (an executive officer of Isolyser), Gene McGrevin (the chairman of
Isolyser) and certain other employees of Isolyser own 10%, 30%, 10% and 50%,
respectively, of Global Resources, and Mr. Mabry is the president of Global
Resources. In accordance with a Services Agreement entered into between Isolyser
and Global Resources, Global Resources agreed to provide Isolyser with supply-
chain management services addressing the sourcing of PVA fiber and manufacturing
and shipping of products by contract manufacturers of Isolyser located in China,
and agreed to protect Isolyser's confidential information and to certain other
covenants protecting Isolyser against competition. For these services, Isolyser
agreed to pay an annual fee of $338,000 (plus certain salary and benefits of
certain employees) for the first year of the Agreement and $250,000 for each of
the second and third year of the Agreement. In addition, Isolyser loaned
$200,000 to Global Resources to finance startup costs. The loan accrues interest
at 6% (with all accrued and unpaid interest added to principal at the end of
year one), and thereafter the loan is repayable in equal quarterly installments
of principal plus accrued and unpaid interest, and matures on May 31, 2003. The
loan is secured by guarantees from each of the other stockholders of Global
Resources and pledges of such other stockholders shares in Global Resources. The
Board of Directors of Isolyser, with Mr. McGrevin abstaining, approved these
various agreements with Global Resources after full consideration of the terms
and provisions of these agreements. During 2000, the Company paid $175,000 for
services rendered and expenses incurred by Global Resources for the benefit of
the Company.
In August, 2000, Isolyser entered into an agreement with VersaCore
Industrial Corporation to purchase from VersaCore certain equipment used for
novel applications of nonwoven materials. Ron Smorada, one of the directors of
the Company, is an owner and the president of VersaCore. The purchase price for
such equipment was to be $350,000, and the equipment was to be custom
manufactured by a third party at a cost to VersaCore which VersaCore has
estimated at approximately $280,000. In accordance with the terms of the
agreement, Isolyser advanced to VersaCore $225,000 in connection with and
following the ordering of such equipment. By agreement with VersaCore, such
order was subsequently cancelled, and it was agreed that Isolyser would not be
required to make further payments for such equipment and would not receive
delivery of such equipment. In addition, Isolyser would be repaid its advance
for the equipment at the time of VersaCore's sale of the equipment to a third
party.
In 1999, the Board of Directors of the Company authorized the repurchase of
Company shares in open market or private purchases. In accordance with the terms
of such share repurchase program, the Company repurchased shares in private
transactions from Travis Honeycutt at their current market value as follows;
50,000 shares on June 5, 2000 at a per share price of $3.375 and 100,000 shares
on October 19, 2000 at a per share price of $2.25. In addition, the Company
repurchased from Dan Lee in a private transaction at the current market price of
Company shares 176,295 shares on December 29, 2000 at a per share price of
$0.9375.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) - Financial Statements and Schedules
36
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, 2000 and 1999
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash
Flows for the years ended December 31, 2000, 1999 and 1998 Notes to the
Consolidated Financial Statements
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Other schedules are omitted because they are not applicable, not required or
because required information is included in the consolidated financial
statements or notes thereto.
(3)(a) Exhibits
2.1 Agreement and Plan of Merger dated March 15, 1996 among the Company,
Microtek Medical, Inc. and MMI Merger Corp. (incorporated by reference
to the Joint Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-4, File No. 333-7977).
2.2 Asset Purchase Agreement dated August 11, 1998, between White Knight
Healthcare, Inc. and Thantex Holdings, Inc. (incorporated by reference
to Exhibit 2.1 filed with the Company's Current Report on Form 8-K
dated August 11, 1998).
2.3 Asset Purchase Agreement dated August 11, 1998, between SafeWaste
Corporation and SafeWaste, Inc. (incorporated by reference to Exhibit
2.2 filed with the Company's Current Report on Form 8-K dated August
11, 1998).
2.4 Arden Plant Agreement dated August 11, 1998, between Isolyser Company,
Inc., Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.3
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
2.5 Barmag Agreement dated August 11, 1998, between Isolyser Company, Inc.
and Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.4
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
2.6 PVA Agreement dated August 11, 1998, between Isolyser Company, Inc.
and Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.5
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
2.7 Abbeville Plant Agreement dated August 11, 1998, between Isolyser
Company, Inc., Thantex Specialties, Inc. and Thantex Holdings, Inc.
(incorporated by reference to Exhibit 2.6 filed with the Company's
Current Report on Form 8-K dated August 11, 1998).
2.8 Stock Purchase Agreement dated June 10, 1999, between Premier Products
LLC and Isolyser Company, Inc. (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K filed July 13, 1999).
2.9 Asset Purchase Agreement dated as of May 25, 1999, among Allegiance
Healthcare Corporation ("Allegiance"), Isolyser and MedSurg
(incorporated by reference to Exhibit 2.1 in the Company's Current
Report on Form 8-K filed July 27, 1999).
2.10 First Amendment to Asset Purchase Agreement dated as of July 12, 1999,
among Allegiance, Isolyser and MedSurg (incorporated by reference to
Exhibit 2.2 in the Company's Current Report on Form 8-K filed July 27,
1999).
2.11 Supply and License Agreement dated as of July 12, 1999,between
Isolyser and Allegiance (incorporated by reference to Exhibit 2.3 in
the Company's Current Report on Form 8-K filed July 27, 1999).
2.12 Escrow Agreement dated as of July 12, 1999, among Allegiance, First
National Bank of Chicago and Isolyser (incorporated by reference to
Exhibit 2.5 in the Company's Current Report on Form 8-K filed July 27,
1999).
37
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 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)
10.10 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)
10.11 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).
10.12 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)
10.13 Agreement dated August 25, 1999, between the Company and Travis W.
Honeycutt (incorporated by reference to Exhibit 10.1 in the Company's
Quarterly Report on Form 10-Q filed November 15, 1999).
10.14 Severance Agreement dated as of December 1, 1999, between the Company
and Peter Schmitt (incorporated by reference to Exhibit 10.21 in the
Company's Annual Report on Form 10-K for the year ended December 31,
1999).
10.15 1999 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Schedule 14A filed on April 19, 1999).
10.16* Severance Agreement dated as of November 30, 2000, between the Company
and Migirdic Nalbantyan.
10.17* Severance Agreement dated as of November 30, 2000, between the Company
and James C. Rushing, III.
10.18* Employment Agreement dated as of December 17, 1998, between the
Company and Jerry Wilson.
10.19* Employment Agreement dated as of July 1, 2000, between the Company and
Michael Mabry.
38
10.20* Letter Agreement dated January ____, 2001, between Allegiance
Healthcare Corporation and the Company.
10.21* Services Agreement dated January ____, 2000, between the Company and
MindHarbor, Inc.
10.22* Services Agreement dated as of June 1, 2000, between the Company and
Global Resources, Inc.
21.1* Subsidiaries of the Company
23.1* Consent of Deloitte & Touche LLP
- --------------------------------------
* Filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ending December 31, 2000.
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. Agreement dated August 25, 1999, between the Company and Travis W.
Honeycutt (incorporated by reference to Exhibit 10.1 in the Company's
Quarterly Report on Form 10-Q filed November 15, 1999).
13. Severance Agreement dated as of December 1, 1999, between the Company and
Peter Schmitt (incorporated by reference to Exhibit 10.21 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999).
14. 1999 Long-Term Incentive Plan (incorporated by reference to Exhibit A to
the Company's Schedule 14A filed on April 19, 1999).
15. Severance Agreement dated as of November 30, 2000, between the Company and
Migirdic Nalbantyan.
16. Severance Agreement dated as of November 30, 2000, between the Company and
James C. Rushing, III.
17. Employment Agreement dated as of December 17, 1998, between the Company and
Jerry Wilson.
18. Employment Agreement dated as of July 1, 2000, between the Company and
Michael Mabry.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 30, 2001.
ISOLYSER COMPANY, INC.
By: /s/ Dan R. Lee
-----------------------------------
Dan R. Lee, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities indicated on March 30, 2001.
SIGNATURE TITLE
- --------- -----
/s/ Dan R. Lee President, Chief Executive Officer and Director
- ------------------------------------
Dan R. Lee (principal executive officer)
/s/ R.G. Wilson Chief Financial Officer and Treasurer (principal financial
- ------------------------------------
R.G. Wilson and accounting officer)
____________________________________ Director
Travis W. Honeycutt
/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/ Ronald L. Smorada Director
- ------------------------------------
Ronald L. Smorada
40
------------------------------------------
Isolyser Company, Inc.
and Subsidiaries
Consolidated Financial Statements
as of December 31, 2000 and 1999 and
for Each of the Three Years in the
Period Ended December 31, 2000
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors of Isolyser Company, Inc.:
Norcross, GA
We have audited the accompanying consolidated balance sheets of Isolyser
Company, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999,
and the related consolidated statements of operations and comprehensive (loss)
income, changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the index at Item 14. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Isolyser Company, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. 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.
Deloitte & Touche LLP
Atlanta, Georgia
February 28, 2001
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS in thousands, except share data
DECEMBER 31, 2000 AND 1999
- -----------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
CURRENT ASSETS:
Cash and cash equivalents $ 14,379 $ 17,006
Accounts receivable, net of allowance for doubtful
accounts of $1,197 and $829, respectively 12,269 12,313
Disposition escrow account - 3,130
Inventory, net 16,160 24,036
Prepaid expenses and other assets 1,633 1,298
-------- --------
Total current assets 44,441 57,783
PROPERTY AND EQUIPMENT:
Land 245 245
Building and leasehold improvements 4,086 4,387
Equipment 13,332 9,320
Furniture and fixtures 1,804 3,550
Other 513 4,081
-------- --------
19,980 21,583
Less accumulated depreciation 12,948 12,990
-------- --------
Property and equipment, net 7,032 8,593
INTANGIBLE ASSETS:
Goodwill 26,691 26,691
Customer lists 386 786
Patent and license agreements 3,944 3,072
Other 55 55
-------- --------
31,076 30,604
Less accumulated amortization 8,019 7,533
-------- --------
Intangible assets, net 23,057 23,071
INVESTMENT IN THANTEX - 3,605
OTHER ASSETS, net 2,439 2,287
-------- --------
TOTAL ASSETS $ 76,969 $ 95,339
======== ========
In thousands, except share data
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
CURRENT LIABILITIES:
Accounts payable $ 4,035 $ 4,905
Accrued compensation 1,164 1,803
Other accrued liabilities 2,096 850
Current portion of long-term debt 256 2,615
Current portion of deferred licensing revenue 1,508 3,000
Current portion of accrued customer rebates 490 -
Current portion of product financing agreement 520 520
--------- ---------
Total current liabilities 10,069 13,693
LONG-TERM LIABILITIES:
Long-term debt 491 -
Long term portion of deferred licensing revenue 1,508 6,000
Long-term portion of accrued customer rebates 490 -
Long-term portion of product financing agreement 406 924
Other long-term liabilities 407 -
--------- ---------
Total long-term liabilities 3,302 6,924
SHAREHOLDERS' EQUITY:
Participating preferred stock, no par, 500,000
shares authorized, none issued - -
Common stock, $.001 par; 100,000,000 shares
authorized; 41,687,155 and 40,730,060 shares
issued, respectively 42 41
Additional paid-in capital 208,613 206,600
Accumulated deficit (143,425) (131,283)
Unearned shares restricted to employee stock
ownership plan (120) (180)
Cumulative translation adjustment (180) (22)
--------- ---------
64,930 75,156
Treasury shares, at cost ; 543,294 and
46,999 shares, respectively (1,332) (434)
--------- ---------
Total shareholders' equity 63,598 74,722
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 76,969 $ 95,339
========= ==========
See notes to consolidated financial statements.
-2-
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
In thousands, except per share data 2000 1999 1998
NET SALES $ 53,931 $ 97,554 $ 147,643
LICENSING REVENUES 2,433 1,500 -
--------- -------- ---------
Net revenues 56,364 99,054 147,643
COST OF GOODS SOLD 35,938 61,970 109,936
--------- -------- ---------
Gross profit 20,426 37,084 37,707
OPERATING EXPENSES:
Selling, general, and administrative 21,246 26,596 40,182
Amortization of intangibles 1,780 1,440 2,052
Research and development 4,098 3,724 3,906
Impairment charge - 769 7,445
Gain on dispositions (21) (628) -
Restructuring charge 1,555 - -
--------- -------- ---------
Total operating expenses 28,658 31,901 53,585
--------- -------- ---------
(LOSS) INCOME FROM OPERATIONS (8,232) 5,183 (15,878)
INTEREST INCOME 823 450 273
INTEREST EXPENSE (474) (1,645) (3,507)
INCOME FROM JOINT VENTURE - - 11
LOSS FROM MINORITY EQUITY POSITION (4,104) - -
--------- -------- ---------
(LOSS) INCOME BEFORE INCOME TAX PROVISION AND EXTRAORDINARY ITEM (11,987) 3,988 (19,101)
INCOME TAX PROVISION 155 1,291 540
--------- -------- ---------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (12,142) 2,697 (19,641)
EXTRAORDINARY ITEM - Gain from extinguishment of debt, net of tax of $0 - - 1,404
--------- -------- ---------
NET (LOSS) INCOME $ (12,142) $ 2,697 $ (18,237)
--------- -------- ---------
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized loss on available for sale securities (13) - -
Foreign currency translation (loss) gain (158) 53 29
--------- -------- ---------
COMPREHENSIVE (LOSS) INCOME $ (12,313) $ 2,750 $ (18,208)
========= ======== =========
NET (LOSS) INCOME PER COMMON SHARE - Basic and Diluted:
(Loss) income before extraordinary item $ (0.29) $ 0.07 $ (0.49)
Extraordinary item - - 0.04
---------- --------- ---------
NET (LOSS) INCOME PER COMMON SHARE - Basic and Diluted $ (0.29) $ 0.07 $ (0.45)
---------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Basic 41,269 40,318 39,655
---------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Diluted 43,221 41,158 39,655
---------- --------- ---------
See notes to consolidated financial statements.
-3-
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
In thousands
Common Stock Treasury Stock
---------------------------- ------------------------
Shares Amount Shares Amount
BALANCE - December 31, 1997 39,554 $ 39 174 $ (1,377)
Issuance of 128 shares of common stock from treasury
pursuant to ESPP (128) 961
Issuance of 250 shares of common stock from treasury
pursuant to 401 (k) plan 250 1
Release of 17 shares reserved for ESOP
Release of 1 White Knight escrow share 1 (18)
Currency translation gain
Net loss
------------------------------------------------------
BALANCE - December 31, 1998 39,804 40 47 (434)
Issuance of 110 shares of common stock
pursuant to ESPP 110
Issuance of 251 shares of common stock
pursuant to 401 (k) plan 251
Release of 17 shares reserved for ESOP
Stock option compensation expense
Tax benefits related to stock options
Exercise of stock options and warrants 565 1
Currency translation gain
Net income
------------------------------------------------------
BALANCE - December 31, 1999 40,730 41 47 (434)
Issuance of 38 shares of common stock
pursuant to ESPP 38
Issuance of 119 shares of common stock
pursuant to 401 (k) plan 119
Release of 17 shares reserved for ESOP
Stock option compensation expense
Purchase of 496 shares of treasury stock 496 (898)
Exercise of stock options and warrants 800 1
Currency translation loss
Net loss
------------------------------------------------------
BALANCE - December 31, 2000 41,687 $ 42 543 $ (1,332)
======================================================
Additional
Paid-in Accumulated Translation ESOP Shareholders'
Capital Deficit Adjustment Shares Equity
BALANCE - December 31, 1997 $ 203,601 $ (115,743) $ (104) $ (300) $ 86,116
Issuance of 128 shares of common stock from treasury
pursuant to ESPP (706) 255
Issuance of 250 shares of common stock from treasury
pursuant to 401 (k) plan 511 512
Release of 17 shares reserved for ESOP (42) 60 18
Release of 1 White Knight escrow share (18)
Currency translation gain 29 29
Net loss (18,237) (18,237)
--------------------------------------------------------------------
BALANCE - December 31, 1998 203,364 (133,980) (75) (240) 68,675
Issuance of 110 shares of common stock
pursuant to ESPP 117 117
Issuance of 251 shares of common stock
pursuant to 401 (k) plan 582 582
Release of 17 shares reserved for ESOP (11) 60 49
Stock option compensation expense 568 568
Tax benefits related to stock options 217 217
Exercise of stock options and warrants 1,763 1,764
Currency translation gain 53 53
Net income 2,697 2,697
--------------------------------------------------------------------
BALANCE - December 31, 1999 206,600 (131,283) (22) (180) 74,722
Issuance of 38 shares of common stock
pursuant to ESPP 111 111
Issuance of 119 shares of common stock
pursuant to 401 (k) plan 366 366
Release of 17 shares reserved for ESOP (44) 60 16
Stock option compensation expense 73 73
Purchase of 496 shares of treasury stock (898)
Exercise of stock options and warrants 1,507 1,508
Currency translation loss (158) (158)
Net loss (12,142) (12,142)
--------------------------------------------------------------------
BALANCE - December 31, 2000 $ 208,613 $ (143,425) $ (180) $ (120) $ 63,598
====================================================================
See notes to consolidated financial statements.
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
In thousands 2000 1999 1998
----------------- ---------------- ----------------
OPERATING ACTIVITIES:
Net (loss) income $ (12,142) $ 2,697 $ (18,237)
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation 2,529 2,604 3,727
Amortization of intangibles 1,780 1,277 2,052
Licensing revenue (2,433) (1,500) -
Provision for doubtful accounts 507 143 291
Provision for obsolete and slow moving inventory 3,522 (1,394) 43
Impairment loss - 769 7,445
Gain on dispositions (20) (628) -
Gain from joint venture - - (11)
Extraordinary gain from extinguishment of debt - - (1,404)
Compensation expense related to ESOP 17 49 17
Stock option compensation expense 73 568 -
Tax benefits related to stock options - 217 -
Changes in assets and liabilities, net of effects
from disposed businesses:
Accounts receivable (463) (1,916) (3,521)
Inventories 4,411 (1,145) 7,679
Prepaid expenses and other assets 2,936 (1,827) 406
Accounts payable (870) 1,474 (4,805)
Accrued compensation (639) 109 (269)
Other liabilities (3,370) (48) (156)
Other accrued liabilities 2,451 (2,829) 772
----------------- ---------------- ----------------
Net cash used in operating activities (1,711) (1,380) (5,971)
----------------- ---------------- ----------------
INVESTING ACTIVITIES:
Purchase of and deposits for property and equipment (1,116) (1,306) (3,299)
Investment in available for sale securities (249) - -
Investment in Global Resources (44) - -
Loss on minority equity position in Thantex 3,604 - -
Acquisition of Lingeman Medical (1,822) - -
Proceeds from sales of property and equipment 168 - -
Disposition proceeds - 35,600 20,416
----------------- ---------------- ----------------
Net cash provided by investing activities 541 34,294 17,117
----------------- ---------------- ----------------
FINANCING ACTIVITIES:
Borrowings under line of credit agreements - 35,967 56,629
Repayments under line of credit agreements - (59,086) (57,802)
Proceeds from notes payable 675 - 110
Repayment of notes payable (3,060) (2,630) (12,852)
Proceeds from issuance of common stock 477 699 511
(Repurchase) issuance of treasury stock (898) - 255
Proceeds from exercise of stock options 1,507 1,764 -
----------------- ---------------- ----------------
Net cash used in financing activities (1,299) (23,286) (13,149)
----------------- ---------------- ----------------
(continued)
-5-
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
EFFECT OF EXCHANGE RATE CHANGES ON CASH (158) 53 29
--------- --------- -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (2,627) 9,681 (1,974)
CASH AND CASH EQUIVALENTS:
Beginning of year 17,006 7,325 9,299
--------- --------- -------
End of year $ 14,379 $ 17,006 $ 7,325
========= ========= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 238 $ 1,345 $ 3,437
========= ========= =======
Income taxes $ 356 $ 928 $ 344
========= ========= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Stock received in exchange for assets disposed (Note 2) $ - $ - $ 3,605
========= ========= =======
Equipment acquired through capital leases $ - $ - $ 277
========= ========= =======
Disposition escrow account (Note 2) $ - $ 3,130 $ -
========= ========= =======
(concluded)
See notes to consolidated financial statements.
-6-
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
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 healthcare 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 has
begun marketing its products, primarily OREX(R) and Enviroguard
Degradables ("OREX" and "Enviroguard"), to industries other than
healthcare, but the Company currently has a minimal presence in those
industries.
The Company's future performance will depend to a substantial degree upon
its ability to successfully market OREX and Enviroguard in commercial
quantities. The Company introduced its Enviroguard products during 1999.
Sales of OREX and Enviroguard products were $1.6 million and $1.7 million
for the years ended December 31, 2000 and December 31, 1999, respectively.
Sales of OREX products were $4.7 million for the year ended December 31,
1998.
In 2000, the Company formed a new subsidiary, MindHarbor, Inc.
("MindHarbor"). The services provided by MindHarbor include information
technology, website and intranet design and support, marketing and
e-Business development, and are insignificant to the Company's operations.
Consolidation Policy - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition - Revenues from the sale of the Company's products are
recognized at the time of shipment. At this point, persuasive evidence of
a sale arrangement exists, delivery has occurred, the Company's price to
the buyer is fixed and collectibility of the associated receivable is
reasonably assured. The Company generally only accepts product returns for
damaged products. Actual returns have not been significant.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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.
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
-7-
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.
Inventories - Inventories are stated at the lower of cost or market. The
first-in first-out ("FIFO") valuation method is used to determine the cost
of inventories. Cost includes material, labor and manufacturing overhead
for manufactured and assembled goods and materials only for goods purchased
for resale. Inventories are stated net of an allowance for obsolete and
slow-moving inventory.
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation and is depreciated using the straight-line method
over the lease life or estimated useful lives of the related assets,
whichever is shorter. At December 31, 2000 the Company had property and
equipment with the following estimated lives:
Property and Equipment Estimated Life
---------------------- --------------
Building and leasehold improvements 3 to 20 years
Equipment 3 to 10 years
Furniture and fixtures 3 to 5 years
Other 3 to 7 years
Intangible Assets - Intangible assets consist primarily of goodwill,
customer lists and patent and license agreements and are amortized using
the straight-line method over the following estimated useful lives:
Intangible Asset Estimated Useful Life
---------------- ---------------------
Goodwill 10 to 40 years
Customer lists 15 years
Patent and license agreements 13 to 17 years
Portions of these intangibles were sold in conjunction with the 1999
dispositions (Note 2).
Investment in Joint Venture - The investment in the joint venture was
accounted for using the equity method of accounting. The joint venture
investment represented a 50.0% ownership interest in a mobile waste
treatment operation, which was sold in conjunction with the August 11, 1998
disposition of SafeWaste.
Investment in Available for Sale Securities - The Company holds
approximately 9.7% interest in Consolidated Ecoprogress Technology, Inc., a
Canadian technology marketing company trading on the Vancouver Securities
Exchange.
Research and Development Costs - Research and development costs include
product research as well as various product and process development
activities and are charged to expense as incurred.
Income Taxes - Deferred tax assets and liabilities are determined based on
the difference between financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized (Note 7).
Foreign Currency Translation - The assets and liabilities of the Company's
United Kingdom subsidiary are translated into U.S. dollars at current
exchange rates, and revenues and expenses are translated at
-8-
average exchange rates. The effect of foreign currency transactions was
not material to the Company's results of operations for the years ended
December 31, 2000, 1999 and 1998.
Impairment of Long-Lived Assets - The Company reviews long-lived assets
and certain intangibles for impairment when events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. In addition, management periodically reviews the
appropriateness of the assets' amortization lives. Any impairment losses
are reported in the period in which the recognition criteria are first
applied based on the fair value of the asset. Assets held for disposal are
carried at the lower of carrying amount or fair value, less estimated cost
to sell such assets. The Company discontinues depreciating or amortizing
assets held for sale effective with the decision to sell the assets (Note
2).
Earnings Per Share - Earnings per share is calculated in accordance SFAS
128, Earnings Per Share, which requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures. Primary and diluted weighted-average share
differences result solely from dilutive common stock options.
Newly Issued Accounting Standards - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138,
which provide a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. Upon adoption, all
derivative instruments will be recognized in the balance sheet at fair
value, and changes in the fair values of such instruments must be
recognized currently in earnings unless specific hedge accounting criteria
are met. The adoption of these pronouncements on January 1, 2001 did not
have a material effect on the Company's financial position.
Reclassifications - Certain reclassifications have been made in the 1999
and 1998 financial statements to conform to the 2000 presentation.
2. ACQUISTIONS AND DISPOSITIONS
On August 11, 1998, the Company disposed of its Arden and Charlotte, North
Carolina OREX manufacturing facilities, 4.5 million pounds of OREX
Inventory (Note 9), the industrial division of its White Knight subsidiary
and substantially all of the assets of its SafeWaste subsidiary for cash
proceeds of $13.5 million. On October 14, 1998, the Company disposed of
its Abbeville, South Carolina OREX manufacturing facility for proceeds of
$8.0 million, consisting of $7.5 million in cash and a $500,000, 8.0% note
payable due October 14, 2003. The net cash proceeds from these
dispositions were used to repay amounts borrowed under the Company's
Credit Agreement (Note 5). In conjunction with these dispositions, the
Company also received a 19.5% ownership interest in Thantex Specialties,
Inc. ("Thantex"), the company formed to own and operate the Arden and
Abbeville facilities. In 2000, after reevaluating the Company's intentions
with respect to Thantex, and considering its financial position, the
Company wrote-off this investment and a related note receivable in its
entirety.
On December 15, 1998, the Company disposed of the Struble and Moffit
division of its White Knight subsidiary for cash proceeds of $1.2 million.
On March 31, 1999, the Company disposed of its former corporate
headquarters in Norcross, Georgia, for cash proceeds of approximately $1.9
million, which were used to repay amounts borrowed under the Company's
Credit Agreement (Note 5).
-9-
Effective May 31, 1999, the Company disposed of the stock of its White
Knight subsidiary for cash proceeds of $8.2 million. These proceeds were
used to reduce outstanding borrowings under the Company's Credit Agreement
(Note 5).
On July 12, 1999, the Company disposed of substantially all of the assets
of its MedSurg subsidiary and entered into a license agreement with
Allegiance Healthcare Corporation ("Allegiance") (Note 10), for net
proceeds of $28.6 million, consisting of $25.5 million in cash and a $3.1
million escrow receivable (the "Disposition Escrow Account"). The escrow
was settled in July 2000. In conjunction with the sale, the company
recorded a gain of $628,000. A portion of the proceeds was used to repay
the then remaining outstanding borrowings under the Company's Credit
Agreement (Note 5).
At December 31, 1999, net assets held for sale were comprised of the
following:
--------------------------------------------------------------
(in thousands)
--------------------------------------------------------------
Assets:
--------------------------------------------------------------
--------------------------------------------------------------
Inventory (LIFO basis in 1998) $ 4,846
-------
--------------------------------------------------------------
Total assets 4,846
--------------------------------------------------------------
--------------------------------------------------------------
Liabilities:
--------------------------------------------------------------
Accounts payable 3,211
--------------------------------------------------------------
Accrued expenses 1,635
-----
--------------------------------------------------------------
Total liabilities 4,846
-----
--------------------------------------------------------------
--------------------------------------------------------------
Net assets held for sale $ -
=====
--------------------------------------------------------------
On January 31, 2000 the Company transferred title of the remaining net
assets held-for-sale to Allegiance. The effect of not depreciating net
assets held for sale was $0, $272,000, and $3.1 million in 2000, 1999 and
1998, respectively.
The following represents the results of operations (including impairment
charges) of the entities that were disposed of for the years ended
December 31, 1999 and 1998, respectively:
(in thousands, except per share data) 1999 1998
Net sales $ 38,673 $ 97,821
Net loss (509) (18,553)
Net loss per share - Basic and Diluted (0.01) (0.47)
On October 19, 2000 Microtek Medical, Inc. ("Microtek"), a subsidiary of
the Company, acquired certain assets and assumed certain liabilities of
Lingeman Medical Products, Inc. ("Lingeman"). In conjunction with the
closing, Microtek issued a Promissory Note in the principal amount of
$675,000, which is payable in equal installments over the next three years
and bears interest at the Prime Rate (8.5% at December 31, 2000).
3. RESTRUCTURING AND IMPAIRMENT LOSS
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
-10-
million to adjust the carrying values of the net assets to their fair
market values based upon actual consideration received. The following
charges were recorded:
(in thousands)
Write-down of inventory (1) $ 900
Write-down of accounts receivable (2) 300
Write-down of property and equipment (3) 5,800
----------
$ 7,000
==========
(1) Included in cost of goods sold
(2) Included in selling, general and administrative expenses
(3) Included in impairment loss
In December 1998, based upon revised estimated consideration to be
received from the disposition of the remainder of White Knight and the
Company's former corporate office, the Company recorded an additional
impairment loss of $1.6 million.
In conjunction with the May 31, 1999 disposition of White Knight (Note 2),
the Company recorded an additional impairment charge of $769,000 to adjust
the carrying values of the related net assets to their fair market values
based upon actual consideration received.
In December 2000, the Company recorded restructuring and impairment
charges of $9.1 million, comprised of the following:
(in thousands)
Impairment of investment in Thantex (3) $ 4,104
Write-down of inventory due to obsolesence (1) 3,477
Severance and consulting arrangements with former officers and employees (2) 885
Write-down of property and equipment due to impairment (2) 389
Closed office lease liabilities (2) 281
------------
$ 9,136
============
(1) Included in cost of goods sold
(2) Included in selling, general and administrative expenses
(3) Includes write-off of a $500,000 note receivable from Thantex
The severance arrangements and closed office lease liabilities were
recorded in conjunction with a restructuring plan that includes the
consolidation of Isolyser's Norcross, Georgia corporate functions into
Microtek's corporate functions in Columbus, Mississippi, the consolidation
of Microtek's Mexico manufacturing facilities into Microtek's Dominican
Republic facilities and the closing of a sales office in New York City.
Severance benefits for 99 employees totaling $636,000 were accrued. The
Company terminated five of these employees in 2000.
4. INVENTORIES
Inventories are summarized by major classification at December 31, 2000
and 1999 as follows:
-11-
----------------------------------------------------------------------------------------
(in thousands) 2000 1999
----------------------------------------------------------------------------------------
Raw materials $ 10,019 $ 12,056
----------------------------------------------------------------------------------------
Work-in-process 984 1,389
----------------------------------------------------------------------------------------
Finished goods 9,830 12,199
--------- --------
----------------------------------------------------------------------------------------
20,833 25,644
----------------------------------------------------------------------------------------
Less reserves for slow moving and obsolete inventories 4,673 1,608
--------- --------
----------------------------------------------------------------------------------------
Inventory, net $ 16,160 $ 24,036
========= =========
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
At December 31, 2000 and 1999, net OREX inventory is approximately $2.6
million and $7.2 million, respectively.
5. LONG-TERM DEBT
The Credit Agreement
The Company is party to a credit agreement between the Company and a Bank
(the "Credit Agreement"). As amended through December 31, 2000, the Credit
Agreement provides for a $10.0 million revolving credit facility, which
matures on June 30, 2001. Borrowings under the facility are based on the
lesser of a percentage of eligible accounts receivable and inventory or
$10.0 million, less any outstanding letters of credit issued under the
Credit Agreement. Borrowing availability under the facility at December 31,
2000 was $10.0 million. Revolving credit borrowings bear interest, at the
Company's option, at either the Alternate Base Rate, plus an Interest
Margin, as defined, ("Interest Margin") or LIBOR plus an Interest Margin
(9.5% at December 31, 2000). Outstanding borrowings under the revolving
credit facility were $0 at December 31, 2000 and 1999.
The Credit Agreement contains certain restrictive covenants, including the
maintenance of certain financial ratios, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and net worth, and places
limitations on acquisitions, dispositions, capital expenditures and
additional indebtedness. In addition, the Company is not permitted to pay
any dividends. At December 31, 2000, the Company was not in compliance with
certain covenants and has obtained a waiver of non-compliance from the
lender.
Subsequent to year-end, the Credit Agreement was amended to provide for an
increase in the facility to $13.0 million until April 30, 2001. During this
period, borrowings will bear interest at the Alternate Base Rate plus an
adjusted Interest Margin.
The Credit Agreement provides for the issuance of up to $1.0 million in
letters of credit. Outstanding letters of credit at December 31, 2000 were
$0, as compared to $50,000 at December 31, 1999. The Credit Agreement also
provides for a fee of .50% per annum on the unused commitment, an annual
collateral monitoring fee of $25,000 and an outstanding letter of credit fee
of 2.0% per annum. Borrowings under the Credit Agreement are collateralized
by the Company's accounts receivable, inventory, property and equipment,
general intangibles, as defined, Isolyser's stock of its subsidiaries and
certain of the Company's plants and offices, and are guaranteed by the
Company.
Other Long-Term Debt
The Company is obligated under certain long-term leases and notes payable,
which aggregated $1.7 million and $4.1 million at December 31, 2000 and
1999, respectively. These obligations bear interest at rates ranging from
6.1% to the 11.9% and mature through October 2003. The acquisition notes
-12-
payable aggregating $675,000 and $2.4 million at December 31, 2000 and
1999, respectively, are subordinated to the Credit Agreement.
The carrying value of long-term debt at December 31, 2000 and 1999
approximates fair value based on interest rates that are believed to be
available to the Company for debt with similar prepayment provisions
provided for in the existing debt agreements.
In 1998 the Company recorded an extraordinary gain of $1.4 million,
relating to the extinguishment of a $1.3 million 7.0% note payable to a
former customer of the White Knight subsidiary.
6. LEASES
The Company leases office, manufacturing and warehouse space and equipment
under operating lease agreements expiring through 2007. Rent expense was
$1.9 million, $2.1 million and $2.8 million in 2000, 1999 and 1998,
respectively. At December 31, 2000, minimum future rental payments under
these leases are as follows:
--------------------------------------------------------
(in thousands)
--------------------------------------------------------
2001 $ 1,333
--------------------------------------------------------
2002 987
--------------------------------------------------------
2003 594
--------------------------------------------------------
2004 414
--------------------------------------------------------
2005 320
--------------------------------------------------------
Thereafter 287
---
--------------------------------------------------------
Total minimum payments $ 3,935
=======
--------------------------------------------------------
The Company may, at its option, extend certain of its office,
manufacturing and warehouse space lease terms through various dates.
7. INCOME TAXES
The income tax provision is summarized as follows:
-----------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------
Current:
-----------------------------------------------------------------------------------------------------
Federal $ (20) $ 466 -
-----------------------------------------------------------------------------------------------------
State 50 454 -
-----------------------------------------------------------------------------------------------------
Foreign 125 154 $ 540
------ ------- -----
-----------------------------------------------------------------------------------------------------
155 1,074 540
-----------------------------------------------------------------------------------------------------
Tax expense resulting from allocating employee
-----------------------------------------------------------------------------------------------------
stock option tax benefits to additional paid-in-capital - 217 -
------ ------- -----
-----------------------------------------------------------------------------------------------------
Total income tax provision $ 155 $ 1,291 $ 540
====== ======= =====
-----------------------------------------------------------------------------------------------------
During 1999, the Company recognized $217,000 in income tax benefits
associated with the exercise of employee stock options. The benefits
recognized related to compensation expense deductions generated during
1996. These income tax benefits were recorded in the accompanying
consolidated financial statements as additional paid-in-capital.
-13-
The income tax provision allocated to continuing operations using the
federal statutory tax rate differs from the actual income tax provision as
follows:
(in thousands) December 31
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Federal statutory rate $ (4,075) (34)% $ 1,356 34% $ (6,494) (34)%
State taxes, net of
federal benefit (605) (5) 300 8 - -
Items not deductible for
tax purposes, primarily
goodwill 136 1 3,045 76 1,323 7
Other, net (25) - (124) (3) 159 1
Valuation allowance 4,724 39 (3,286) (83) 5,552 29
-------- --- ------- ----- --------- ---
Total $ 155 1% $ 1,291 32% $ 540 3%
======== === ======= ==== ========= ===
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Deferred income taxes as of December 31, 2000 and 1999 are as follows:
-----------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------------------
(in thousands) 2000 1999
-----------------------------------------------------------------------------------------------
Deferred income tax assets (liabilities):
-----------------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 312 $ 185
-----------------------------------------------------------------------------------------------
Inventory 2,118 3,610
-----------------------------------------------------------------------------------------------
Accrued expenses (479) 321
-----------------------------------------------------------------------------------------------
Other (90) -
-----------------------------------------------------------------------------------------------
Valuation allowance (1,861) (4,116)
--------- -----------
-----------------------------------------------------------------------------------------------
Net deferred income taxes - current - -
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Operating loss carryforward 35,159 26,318
-----------------------------------------------------------------------------------------------
Capital loss carryforward 4,030 5,147
-----------------------------------------------------------------------------------------------
Intangible assets (659) (560)
-----------------------------------------------------------------------------------------------
Property and equipment (439) (502)
-----------------------------------------------------------------------------------------------
Tax credit carryforwards 244 384
-----------------------------------------------------------------------------------------------
Deferred license revenue 1,207 3,416
-----------------------------------------------------------------------------------------------
Investment write-off 1,640 -
-----------------------------------------------------------------------------------------------
Valuation allowance (41,182) (34,203)
--------- -----------
-----------------------------------------------------------------------------------------------
Net deferred income taxes - noncurrent - -
--------- -----------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Total deferred income taxes $ - $ -
--------- -----------
-----------------------------------------------------------------------------------------------
Gross deferred income tax assets and liabilities equaled $44.3 million and
$1.3 million, respectively, at December 31, 2000 and $39.4 million and $1.1
million, respectively, at December 31, 1999.
During 1998, the Company increased its valuation allowance by $5.6 million
to $41.6 million. During 1999, the Company decreased its valuation
allowance by $3.3 million to $38.3 million. During 2000, the Company
increased its valuation allowance by $4.7 million to $43.0 million.
At December 31, 1998, the Company had net federal and state operating loss
carryforwards of $83.8 million and $76.0 million, respectively. In
conjunction with the May 1999 White Knight disposition (Note 2), net
federal and state operating loss carryforwards of $9.7 million and $5.7
million were
-14-
transferred to the purchaser. During 1999, net federal and state operating
loss carryforwards of $7.1 million and $11.6 million, respectively, were
utilized to reduce taxable income. Of these loss carryforwards utilized,
$1.1 million related to compensation expense associated with the exercise
of employee stock options in 1996. The income tax benefit associated with
this $1.1 million was recorded in the accompanying consolidated financial
statements as additional paid-in capital. At December 31, 1999 the Company
had net federal and state operating loss carryforwards of $67.0 million and
$58.6 million, respectively, of which $3.2 million related to compensation
expense associated with the exercise of employee stock options. At December
31, 2000 the Company has federal and state net operating loss carryforwards
of $87.6 million and $89.4 million, respectively, of which $5.2 million
relates to compensation expense associated with the exercise of employee
stock options. These loss carryforwards expire at various dates through
2020.
At December 31, 2000, the Company has tax credit carryforwards of $244,000,
which expire in 2019 and 2020.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in routine litigation and proceedings in the
ordinary course of business. Management believes that pending litigation
matters will not have a material adverse effect on the Company's financial
position or results of operations.
In connection with the sales of several of its former businesses over the
last two years, the Company has entered into various agreements with
purchasers to indemnify the purchasers against certain matters, including
without limitation undisclosed liabilities and breaches of representations
and warranties by Isolyser. The Company is not aware of any outstanding
claims for indemnification in connection with these transactions.
9. PRODUCT FINANCING AGREEMENT
In conjunction with the August 11, 1998 disposition of the Arden
manufacturing facility (Note 2), the Company entered into a product
financing arrangement with Thantex whereby the Company agreed to repurchase
2.6 million pounds of OREX fiber originally sold to Thantex for $0.45 per
pound, either as fiber or converted product for $0.80 per pound ratably
over a four year period. Accordingly, the Company continues to record this
inventory at historical carrying value and has recorded a liability for the
repurchase price to Thantex in the accompanying consolidated financial
statements. The difference between the repurchase price and the sale price
represents deferred interest expense, which is being recognized on a
straight line basis over a four year period.
10. LICENSE AGREEMENT
In conjunction with the July 12, 1999 disposition of MedSurg (Note 2), the
Company entered into a 42 month agreement which provides Allegiance with
the exclusive right to market the Company's Enviroguard products in the
global healthcare market. The payment of $10.5 million allocated to the
agreement is being recognized as license revenue over the life of the
agreement. In July 2000 the Company and Allegiance resolved claims for
indemnification made by Allegiance in conjunction with the sale of MedSurg.
As part of the settlement, Allegiance received a payment of $2.5 million
from the Disposition Escrow account. The Company also agreed to pay a
rebate to Allegiance over the next two years, payable in equal installments
in July 2001 and July 2002. These settlements were recorded as adjustments
to deferred licensing revenues. In addition to the license fee, Allegiance
agreed to purchase a minimum amount of fabric over the life of the
agreement for a pre-determined price. As
-15-
part of the agreement, Allegiance and the Company agreed to develop a new
generation of processing systems which will compliment the Enviroguard
fabric life cycle cost performance. The processing systems will be produced
and supported by the Company and Allegiance and Allegiance will pay the
Company a royalty if the products are disposed of via a publicly owned
water treatment facility.
Deferred licensing revenues at December 31, 2000 were $3.0 million, to be
amortized into revenues over the next 24 months at a rate of $126,000 per
month. A summary of deferred licensing revenue at December 31, 2000 is as
follows:
(in thousands)
Original payment allocated to license revenue $ 10,500
Amortization in 1999 (1,500)
Amortization in 2000 (2,433)
Settlement with Allegiance and write-off of receivables (3,551)
--------
Remaining deferred license revenue to be amortized $ 3,016
========
11. SHAREHOLDERS' EQUITY
Preferred Stock - On April 24, 1994, the Company authorized, for future
issuance in one or more series or classes, 10.0 million shares of no par
value preferred stock. On December 19, 1996, the Company allocated 500,000
of the authorized shares to a series of stock designated as Participating
Preferred Stock.
Stock Options - On April 28, 1992, the Company adopted the 1992 Stock
Option Plan (the "1992 Plan") which, as amended, authorizes the issuance of
up to 4.8 million shares of common stock to certain employees, consultants
and directors of the Company under incentive and/or nonqualified options
and/or alternate rights. An alternate right is defined as the right to
receive an amount of cash or shares of stock having an aggregate market
value equal to the appreciation in the market value of a stated number of
shares of the Company's common stock from the alternate right grant date to
the exercise date. The 1992 Plan Committee may grant alternate rights in
tandem with an option, but the grantee may only exercise either the right
or the option. Options and/or rights under the 1992 Plan may be granted
through April 27, 2002 at prices not less than 100% of the market value at
the date of grant. Options and/or rights become exercisable based upon a
vesting schedule determined by the 1992 Plan Committee and become fully
exercisable upon a change in control, as defined. Options expire not more
than ten years from the date of grant and alternate rights expire at the
discretion of the 1992 Plan Committee. Through December 31, 2000, no
alternate rights had been issued.
The Company has also granted nonqualified stock options to certain
employees, non-employees, consultants and directors to purchase shares of
the Company's common stock outside of the 1992 Plan. Options granted expire
in various amounts through 2001.
In April 1995, the Company adopted a Director Stock Option Plan, which
authorizes the issuance of up to 30,000 shares of common stock. At December
31, 2000, currently exercisable options for 16,000 shares were outstanding
under this plan.
In March 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"), which was approved by the shareholders on May 27, 1999. The 1999
Plan authorizes the issuance of up to 1.2 million shares of common stock to
certain employees, consultants and directors of the Company under incentive
and/or nonqualified options, stock appreciation rights ("SARs") and other
stock awards
-16-
(collectively, "Stock Awards"). Stock Awards under the 1999 Plan may be
granted at prices not less than 100% of the market value at the date of
grant. Options and/or SARs become exercisable based upon a vesting schedule
determined by the 1999 Plan Committee and become fully exercisable upon a
change in control, as defined. Options expire not more than ten years from
the date of grant and SARs and other stock awards expire at the discretion
of the 1999 Plan Committee. The 1999 Plan is unlimited in duration. As of
December 31, 2000, there were 740,500 options outstanding under the 1999
Plan.
A summary of option activity during the three years ended December 31, 2000
is as follows:
---------------------------------------------------------------------
Weighted Average
---------------------------------------------------------------------
Shares Exercise Price
---------------------------------------------------------------------
Outstanding - December 31, 1997 3,895,304 $5.54
---------------------------------------------------------------------
Granted 2,826,417 2.51
---------------------------------------------------------------------
Canceled (2,841,554) 5.81
----------
---------------------------------------------------------------------
Outstanding - December 31, 1998 3,880,167 3.13
---------------------------------------------------------------------
Granted 1,115,346 2.51
---------------------------------------------------------------------
Exercised (555,250) 3.17
---------------------------------------------------------------------
Canceled (648,919) 4.28
--------
---------------------------------------------------------------------
Outstanding - December 31, 1999 3,791,344 2.76
---------------------------------------------------------------------
Granted 597,276 2.06
---------------------------------------------------------------------
Exercised (800,369) 1.88
---------------------------------------------------------------------
Canceled (453,723) 2.32
----------
---------------------------------------------------------------------
Outstanding - December 31, 2000 3,134,528 $2.91
==========
---------------------------------------------------------------------
On February 25, 1998, the Company permitted option holders to exchange all
of their stock options having an exercise price at or above $3.49 for a
lesser number of replacement stock options at a new exercise price equal to
the then current fair market value of a share common stock. The exchange
program was made available to all then current employees except one
executive officer. As a result 1,379,732 options at a weighted-average
exercise price of $7.12 were exchanged for 1,034,662 options with a
weighted-average exercise price of $3.37.
In connection with the MedSurg disposition (Note 2), the Company, on
various dates during 1999, canceled options for 8,106 common shares and
granted new options for 9,811 common shares at market value. FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of Accounting Principles Board ("APB")
Opinion No. 25, effective July 1, 2000, required the Company to
prospectively account for these 9,811 options and any other options
repriced after December 15, 1998 using variable plan accounting.
Additionally, in 1999 the Company accelerated the vesting and extended the
expiration dates of options for 663,697 common shares and, accordingly,
recorded $568,000 in compensation expense in the accompanying consolidated
financial statements. Of these options, 300,000, with $215,000 in related
compensation expense, were owned by the Company's former Chief Financial
Officer. In 2000, the Company accelerated the vesting for 181,447 common
shares and recorded $73,000 in compensation expense. Of these options,
112,500 and 25,000 were owned by the Company's former Chief Executive and
Chief Financial Officer, respectively. Due to the option exercise price
exceeding the average market price, there was no related compensation
expense recorded.
-17-
The following table summarizes information pertaining to options
outstanding and exercisable at December 31, 2000:
------------------------------------------------------------------------------------------------------
Weighted
------------------------------------------------------------------------------------------------------
Average Weighted Weighted
------------------------------------------------------------------------------------------------------
Remaining Average Average
------------------------------------------------------------------------------------------------------
Range of Number Contractual Exercise Number Exercise
------------------------------------------------------------------------------------------------------
Exercise Prices Outstanding Life (Years) Price Exercisable Price
------------------------------------------------------------------------------------------------------
$ 0.83 - $ 1.20 252,500 6.6 $ 1.18 174,000 $ 1.18
------------------------------------------------------------------------------------------------------
$ 1.25 - $ 1.50 352,470 5.7 1.29 245,958 1.28
------------------------------------------------------------------------------------------------------
$ 2.12 - $ 2.75 1,184,126 5.8 2.26 564,684 2.32
------------------------------------------------------------------------------------------------------
$ 2.80 - $ 4.70 1,013,432 3.7 3.37 804,127 3.39
------------------------------------------------------------------------------------------------------
$ 4.75 - $ 8.25 288,000 1.2 5.70 283,000 5.69
------------------------------------------------------------------------------------------------------
$ 8.30 - $14.50 44,000 0.0 14.35 44,000 14.35
------------------------------------------------------------------------------------------------------
3,134,528 4.7 $ 2.91 2,115,769 $ 3.21
========= ==========
------------------------------------------------------------------------------------------------------
At December 31, 2000, 1999 and 1998, exercisable options were 2,115,769,
1,889,946 and 2,481,950, respectively, at weighted average exercise prices
of $3.21, $3.17 and $3.46, respectively.
The weighted average fair value of options granted in 2000, 1999 and 1998
was $1.78, $1.35 and $1.48, respectively, using the Black Scholes option
pricing model with the following assumptions:
---------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------
Dividend yield 0.0% 0.0% 0.0%
---------------------------------------------------------------------
Expected volatility 103.6% 40.3% 47.6%
---------------------------------------------------------------------
Risk free interest rate 5.8% 5.4% 5.3%
---------------------------------------------------------------------
Forfeiture rate 21.8% 3.8% 15.7%
---------------------------------------------------------------------
Expected life, in years 7.7 7.2 7.1
---------------------------------------------------------------------
The volatility rate calculated in 1999 and 1998 used data from peer
companies since the Company's trading history did not provide the requisite
five years of trading data. Beginning in 2000, the volatility rate is
calculated using only the Company's trading history.
Employee Stock Purchase Plan - In April 1995, the Company adopted an
Employee Stock Purchase Plan (the "1995 ESPP") which authorized the
issuance of up to 300,000 shares of common stock. Under the 1995 ESPP,
employees could contribute up to 10% of their compensation toward the
purchase of common stock at each year-end. The employee purchase price was
derived from a formula based on fair market value of the Company's common
stock. In January 1999, after all 300,000 common shares were issued, the
1995 ESPP was terminated.
In March 1999, the Company adopted a new Employee Stock Purchase Plan (the
"1999 ESPP") which authorizes the issuance of up to 700,000 shares of
common stock. Under the 1999 ESPP, eligible employees may contribute up to
10% of their compensation toward the purchase of common stock at each year-
end. The employee purchase price is derived from a formula based on fair
market value of the Company's common stock. During 2000 the Company granted
rights to purchase 118,879 shares, which were issued in January 2001. Pro
forma compensation cost associated with the rights granted under the 1999
ESPP is estimated based on fair market value.
-18-
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. The Company also
applies the disclosure-only provisions of SFAS 123, Accounting for
Stock-Based Compensation. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at
the grant dates consistent with SFAS 123, the Company's pro forma net
(loss) income and basic and diluted net (loss) income per share for 2000,
1999 and 1998 would have been as follows:
-------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2000 1999 1998
-------------------------------------------------------------------------------------------------------
Net (loss) income $ (12,528) $ 1,808 $ (20,548)
========= ======= =========
-------------------------------------------------------------------------------------------------------
Net (loss) income per share - Basic and Diluted $ (0.30) $ 0.04 $ (0.51)
========= ====== =======
-------------------------------------------------------------------------------------------------------
At December 31, 2000 and 1999, shares available for future grants are
1,623,937 and 1,846,000 under the Company option plans and the 1995 and
1999 ESPP.
Employee Stock Ownership Plan - Effective December 1, 1992, Microtek
adopted an Employee Stock Ownership Plan ("ESOP") to which the Company has
the option to contribute cash or shares of the Company's common stock.
During 1993, the Company contributed 16,500 common shares to the ESOP. On
November 29, 1993, the Company reserved an additional 148,500 common
shares at $3.64 per share for issuance to the ESOP. As consideration for
the 148,500 reserved shares, the ESOP issued a $540,000 purchase loan (the
"ESOP Loan") to the Company, payable in equal annual installments of
$79,000, including interest at 6% commencing November 29, 1994. During
each of 2000, 1999 and 1998, 16,500 reserved shares have been released,
resulting in compensation expense of $16,500, $49,000, and $18,000,
respectively. At December 31, 2000, 33,000 common shares with a market
value of $33,000 remain unearned under the ESOP.
The Company's contributions to the ESOP each plan year will be determined
by the Board of Directors, provided that for any year in which the ESOP
Loan remains outstanding the contributions by the Company are not less
than the amount needed to provide the ESOP with sufficient cash to pay
installments under the ESOP Loan. The Company contributed $79,392 to the
ESOP during each of 2000, 1999 and 1998.
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 consolidated financial statements.
Shareholder Rights Plan - On December 19, 1996, the Company adopted a
shareholder rights plan under which one common stock purchase right is
attached to and trades with each outstanding share of the Company's common
stock. The rights become exercisable and transferable, apart from the
common stock, ten days after a person or group, without the Company's
consent, acquires beneficial ownership of, or the right to obtain
beneficial ownership of, 15% or more of the Company's common stock or
announces or commences a tender or exchange offer that could result in 15%
ownership. Once exercisable, each right entitles the holder to purchase
one one-hundredth of a share of Participating Preferred Stock at a price
of $60.00 per one one-hundredth of a Preferred Share, subject to
adjustment to prevent dilution. The rights have no voting power and, until
exercised, no dilutive effect on net income per common share. The rights
expire on December 31, 2006, and are redeemable at the discretion of the
Board of Directors at $.001 per right.
-19-
If a person acquires 15% ownership, other than via an offer approved by
the Company under the shareholder rights plan, then each right not owned
by the acquirer or related parties will entitle its holder to purchase, at
the right's exercise price, common stock or common stock equivalents
having a market value immediately prior to the triggering of the right of
twice that exercise price. In addition, after an acquirer obtains 15%
ownership, if the Company is involved in certain mergers, business
combinations, or asset sales, each right not owned by the acquirer or
related persons will entitle its holder to purchase, at the right's
exercise price, shares of common stock of the other party to the
transaction having a market value immediately prior to the triggering of
the right of twice that exercise price.
In September 1997, the Company amended its shareholder rights plan to
include a provision whereby it may not be amended and rights may not be
redeemed by the Board of Directors for a period of one year or longer. The
provision only limits the power of a new Board in those situations where a
proxy solicitation is used to evade protections afforded by the
shareholder rights plan. A replacement Board retains the ability to review
and act upon competing acquisition proposals.
Stock Repurchase Program - Effective February 22, 2000 and until December
31, 2000, the Board of Directors authorized the repurchase of up to 5.0%
of the Company's outstanding common stock from time to time in open market
or private transactions. As of December 31, 2000 the Company had
repurchased 496,295 shares for an aggregate of $898,000. The program has
been extended through December 2001 and authorizes the repurchase of an
additional 1.0 million shares.
12. SIGNIFICANT CUSTOMER AND GEOGRAPHIC CONCENTRATIONS
The Company generated 17%, 15% and 22% of its sales from a single customer
in 2000, 1999 and 1998, respectively. The related accounts receivable from
these customers were $3.1 million, $2.1 million and $2.5 million at
December 31, 2000, 1999 and 1998, respectively.
Included in the Company's consolidated balance sheet at December 31, 2000
are the net assets of the Company's manufacturing and distribution
facilities located in the United Kingdom, China, Mexico and the Dominican
Republic, which total $7.1 million. Only the facility in the United
Kingdom sells products to external customers. Sales from the United
Kingdom were $3.1 million, $4.4 million and $4.5 million in 2000, 1999 and
1998, respectively.
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 stock with a fair value of $366,000, $582,000 and $511,000 to
the plan during 2000, 1999 and 1998, respectively.
14. SUBSEQUENT EVENTS
Deka Medical, Inc. - On February 9, 2001 Microtek entered into a
definitive agreement to acquire substantially all of the assets of Deka
Medical, Inc. ("Deka") for cash. Microtek and Deka manufacture and sell
specialty equipment drapes used in various surgical procedures to prevent
infection. Concurrently with the signing of the definitive agreement,
Microtek acquired Deka's post-surgical clean-up product line. On March 9,
2001, the acquisition of the remaining assets of Deka was completed.
-20-
MICROBasix LLC - On February 16, 2001 the Company acquired the assets of
MICROBasix LLC ("MICROBasix") for cash. The acquisition follows the
development of a cooperative alliance relationship with MICROBasix in 2000
for the purpose of sharing technologies, products and services that
provide significant volume reduction of low level radioactive waste for
the nuclear industry.
-21-
15. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended Quarter
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December 31, First Second Third Fourth
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2000
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Net sales $ 14,015 $ 14,428 $ 14,168 $ 13,753
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Gross profit 6,113 6,658 6,186 1,469
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Net (loss) income 2 111 93 (12,348)/1/
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(Loss) income per common share -
- ----------------------------------------------------------------------------------------------------------------------------
Basic & Diluted .00 .00 .00 (0.29)
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1999
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ 34,769 $ 32,251 $ 17,053 $ 14,981
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 10,970 12,827 7,340 5,947
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income (367) 984 1,310/1/ 770
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(Loss) income per common share -
- ----------------------------------------------------------------------------------------------------------------------------
Basic & Diluted /2/ (0.01) 0.02 0.03 0.02
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- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
1 Includes restructuring and impairment charges (Note 3)
2 Due to the changes in the number of shares outstanding, the quarterly
share amounts do not add to the total for the year.
-22-
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
====================================================================================================================================
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Beginning Charged to Balance at
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Description of Period Expense Deductions/1/ End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful trade accounts
- ------------------------------------------------------------------------------------------------------------------------------------
receivable $ 1,644 $ 291 $ (896) $ 1,039
========= ========= ========= =========
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Reserve for obsolete and slow-moving
- ------------------------------------------------------------------------------------------------------------------------------------
inventories $ 22,411 $ 43 $(20,272)/2/ $ 2,182
========= ========= ========= =========
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Year ended December 31, 1999:
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful trade accounts
- ------------------------------------------------------------------------------------------------------------------------------------
receivable $ 1,039 $ 249 $ (459) $ 829
========= ========= ========= =========
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Reserve for obsolete and slow-moving
- ------------------------------------------------------------------------------------------------------------------------------------
inventories $ 2,182 $ 134 $ (708) $ 1,608
========= ========= ========= =========
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Year ended December 31, 2000:
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful trade accounts
- ------------------------------------------------------------------------------------------------------------------------------------
receivable $ 829 $ 507 $ (139) $ 1,197
========== ========= ========= ========
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Reserve for obsolete and slow-moving
- ------------------------------------------------------------------------------------------------------------------------------------
inventories $ 1,608 $ 3,522 $ (457) $ 4,673
========== ========= ========= =========
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Reserve for restructuring expenses $ -- $ 1,165 $ - $ 1,165
========== ======== ========= ========
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(1) Deductions represent amounts written off during the period less recoveries
of amounts previously written off.
(2) Represents inventory written off.
-23-