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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, 2001 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)
1850-E BEAVER RIDGE CIRCLE
NORCROSS, GEORGIA 30071
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(Address of principal executive offices) (Zip Code)
(770) 806-9898
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.001 par value per share
stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by nonaffiliates of the
registrant based on the sale trade price of the common stock as reported on The
Nasdaq Stock Market on March 15, 2002, was approximately $116.4 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 15, 2002, there were outstanding 42,225,382 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-8 (File Nos.
33-85668), annual reports on Form 10-K for the periods ended December 31, 1994,
December 31, 1995, December 31, 1996 and December 31, 2000, quarterly report on
Form 10-Q for the period ended June 30, 2001, Schedule 14A filed on April 14,
1999, and current reports on Form 8-K dated June 4, 1996, December 19, 1996,
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 2002
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
primary operating units. Microtek Medical, Inc. ("Microtek"), an Isolyser
subsidiary, is the centerpiece of Isolyser's infection control business serving
the healthcare industry. OREX Technologies International ("OTI"), a division of
Isolyser, focuses on the commercialization of Isolyser's disposal technologies.
Microtek, a market leading healthcare company within its area of focus,
manufactures and sells infection control products such as equipment drapes and
patient drapes primarily for use in operating rooms and outpatient surgical
centers.
OTI seeks to develop and commercialize contamination control materials
and products coupled with engineered systems for the treatment and disposal of
those materials and products using proprietary technology and know-how. While
OTI has in the past sought to develop and commercialize such products for
healthcare applications, OTI currently focuses primarily on seeking to
commercialize its degradable OREXTM products and technology for disposing of
such products in the nuclear power generating industry.
Business Strategy
The Company intends to improve its operating results through the
following strategies:
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.
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. 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. Through OTI, the Company currently focuses
primarily on the nuclear power industry in seeking to commercialize its OREX
Degradable products. 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 "-OREX Commercialization Risks".
Reduction of Costs. The Company has implemented a program to reduce its
costs and thereby increase its net income through manufacturing, corporate
overhead and OTI's operating expense reductions.
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Products and Markets
Infection Control Products
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's products consist primarily of the following:
Equipment Drapes. Microtek's line of equipment drapes consists 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.
Patient Drapes. Microtek manufactures and sells both non-woven and
plastic patient drapes. Microtek's non-woven patient drapes are limited to
specialty patient drapes with various enhancements, such as fluid collection
pouches, incise and unique procedure-specific designs. Fox example, angiography
drapes are specially designed patient drapes used in angiography procedures.
Microtek acquired its line of angiography drapes as a result of the acquisition
by Microtek from Deka Medical, Inc. ("Deka") of substantially all of the assets
of Deka.
Safety Products. Microtek manufactures and sells a leading line of
encapsulation products for the management of potentially infectious and
hazardous waste. The primary component of this product line, called Liquid
Treatment System or LTS, is a super-absorbent powder which converts potentially
infectious liquid waste to a solid form. LTS is typically added to a suction
canister or other fluid collection device in which fluids are collected during
surgery or in wound drainage after surgery to solidify such fluids, thereby
facilitating handling, transportation and disposal. The Company's LTS Products
are sold in two forms, Isosorb, which solidifies liquid waste without any
germicidal component, and LTS-Plus, which is registered with the Environmental
Protection Administration (EPA) as a medical waste treatment product. This
registration 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".
Other Products. Other products manufactured and sold by Microtek
include its Venodyne pneumatic pumps and disposable compression sleeves used in
reducing deep vein thrombosis, decanters used for sterile transfer of fluids,
specially designed disposable pouches or fluid-control products which are
attached to patient drapes to collect fluids, wound evacuation products, and
kits to facilitate cleanup of operating rooms after use called CleanOp products.
In first quarter 2001, Microtek acquired substantially all of the
assets of Deka used in Deka's drape and CleanOp 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.
Equipment and patient drapes generated 60.6 percent of Isolyser's
revenues in 2001 as compared to 56.4 percent in 2000 and 55.7 percent in 1999.
Venodyne product revenues represented 6.2 percent, 10.2 percent and 9.4 percent
of Isolyser's revenues in 2001, 2000 and 1999, respectively. Safety product
revenues were 9.6 percent, 14.1 percent and 13.9 percent of Isolyser's revenues
in 2001, 2000 and 1999, respectively. Export sales by Microtek during 1999, 2000
and 2001 were $6.8 million, $5.7 million and $9.9 million, respectively.
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OREX Degradables
OREX Degradables 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.
These materials and products may include woven and nonwoven fabrics; resin; film
and hard plastics and extruded products. 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 disposal through the municipal
sewer system or other specialty engineered treatment and disposal systems. See
"Risk Factors - History of Net Losses", "-OREX Commercialization Risks", "- OREX
Manufacturing and Supply Risks" and "- OTI Regulatory Risks".
Due to a number of factors including the Company's program to reduce
its costs, the Company is currently focused through its OTI division in
commercializing its OREX Degradable products and processing technology primarily
in nuclear power markets. OTI's nuclear products consist of protective clothing
products such as coveralls, hoods and booties, and are marketed in two forms.
One form is designed for single use and the other form may be laundered for a
limited number of repeat uses. These products are used in the nuclear power
industry to help protect people from radioactive contamination, primarily in
connection with periodic maintenance and re-fueling of nuclear power systems. As
a part of such use, the products may become contaminated. As a result, such
products are required to be treated after use as low-level radioactive materials
and thereby become subject to regulations addressing the manner in which they
are processed and disposed. During 2001, OTI acquired a processing system called
MICROBasix which may be used to process OREX products. The MICROBasix processing
system substantially reduces the volume of OREX products, separates radioactive
contaminants and facilitates the disposal of processed by-product material.
While the Company has received favorable responses from large nuclear power
facilities using the Company's products, no significant sales have been made to
date by OTI in the nuclear power industry.
During 2001, OTI entered into a service, marketing and processing
alliance with Eastern Technologies, Inc. (ETI), a small, privately held
enterprise providing protective clothing and laundering services to the nuclear
power industry. Under this relationship, ETI's Alabama facility has become the
site for a centralized MICROBasix processor facility. ETI has agreed to pay OTI
a percentage of the price charged by ETI to its customers for processing
services. Subject to certain conditions, ETI maintains exclusive rights to
process the OREX materials in the United States and Canada through December 31,
2004. Under a License and Supply Agreement between OTI and ETI, ETI serves as a
nonexclusive distributor of single use OREX products to the nuclear power
industry and serves as the exclusive co-marketer with OTI of OREX LaunderablesTM
through December 31, 2004. Under the License and Supply Agreement, ETI has
agreed to pay OTI a fixed price for the supply of the single use and launderable
OREX products and a royalty on the launderable products equal to a percentage of
the single use fees charged by ETI for the supply of launderable products its
customers.
Prior to 2001, the Company was focusing on delivering OREX Degradables
to the healthcare industry. In 1999, Isolyser granted to Allegiance Healthcare
Corporation an exclusive worldwide license to manufacture, use and sell products
made with Isolyser's proprietary degradable materials for use in healthcare
applications. During 2001, the Company and Allegiance Healthcare mutually agreed
to discontinue commercialization efforts in the healthcare market. If at any
time until April 11, 2003, OTI determines that a change in circumstances makes
it advisable to reintroduce degradable products to the healthcare marketplace,
the Company has agreed to offer Allegiance Healthcare the opportunity to enter
into a new agreement with the Company on terms at least as favorable as those
contained in the Company's previous license to Allegiance Healthcare. See "Risk
Factors - Reduced OREX Market Potential".
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,
for the past several years 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", "-OREX Commercialization Risks" and "-OREX Manufacturing and Supply
Risks".
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Marketing and Distribution
Substantially all of the Company's sales in 2001 were made to the
healthcare market.
As of December 31, 2001, the Company's marketing and sales force
consisted of 28 sales representatives, 20 of whom are employed by the Company
and eight of whom are independent representatives; three field sales managers;
one home office sales manager; five marketing managers and 25 persons in
customer support. This marketing and sales force represents the Company's
infection control products and does not market or sell the Company's OREX
products and services.
The Company is dependent upon a few large distributors for the
distribution of its products. The Company's top three customers accounted for
approximately 35% of the Company's total revenues during 2001. Of these
customers, Allegiance Healthcare and Maxxim Medical, Inc. accounted for
approximately 16.6% and 10.6%, respectively, of the Company's total sales during
2001. 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 infection control products domestically through
two channels or customer categories. The Company sells its products bearing the
Microtek brand directly to hospitals and through large distributors. Microtek
also sells non-branded products (sometimes called OEM products) to custom
procedure tray companies and equipment manufacturers for which Microtek
manufactures equipment drapes.
The Company's total export sales during 1999, 2000 and 2001 were $7.0
million, $5.7 million and $9.9 million, respectively. Outside the United States,
the Company markets its products principally through a network of approximately
185 different dealers and distributors. As of December 31, 2001, the Company
also had three sales representatives operating in international markets, and
maintains an office and warehouse distribution center near Manchester, England.
Manufacturing and Supplies
The Company manufactures its infection control products at its
facilities in Columbus, Mississippi, Tyler, Texas, Athens, Texas and the
Dominican Republic. The Company utilizes a facility in Jacksonville, Florida as
a distribution point for the receipt and shipment of product and for light
manufacturing. The Company also maintains a distribution facility near
Manchester, England, and a small facility in Waynesville, North Carolina used to
manufacture prototypes of surgical drapes. Through the Company's relationship
with Global Resources, Inc., the Company uses contract manufacturers in China
for certain of its infection control products when advantageous.
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 commercialize the use of a second
generation polymer system known 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. See
"Risk Factors - Manufacturing and Supply Risks".
In 1998, 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
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converted goods) over a four year period expiring in August, 2002 at a cost of
$.80 per pound of fiber. Through 2001, the Company has paid $1.7 million for
such fiber.
The Company has developed and begun sourcing OREX materials using the
hydroentangled method of nonwoven roll-good material manufacturing. Through
these roll-good material development and manufacturing efforts, both domestic
and internationally, the Company seeks to reduce the cost of producing OREX
non-woven products 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 and North America supply
nonwoven materials. The Company relies to a significant extent on manufacturers
located in China to convert roll goods into finished products for sale by the
Company.
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 spunlaced OREX
fabric. The Company's requirements (which to date have been modest) for OREX
film products are currently being supplied by a contract manufacturer. See "Risk
Factors - OREX Manufacturing and Supply Risks".
Order Backlog
At December 31, 2001, the Company's order backlog totaled approximately
$1.2 million compared to approximately $473,000 (in each case net of any
cancellations) at December 31, 2000. All backlog orders at December 31, 2001 are
expected to be filled prior to year end 2002. Microtek typically sells its
products pursuant to written purchase orders which generally may be canceled
without penalty prior to shipment of the product. Accordingly, the Company does
not believe that the level of backlog orders at any date is material or
indicative of future results.
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.
Isolyser holds numerous patents issued by the United States Patent and
Trademark Office relating to several aspects of its OREX line of products,
including several patents concerning methods of manufacture, methods of use,
methods of disposal, and patents covering several of the OREX products
themselves. Specifically, the Company currently holds: (1) U.S. Patent No.
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; (2) 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; (3) U.S. Patent No. 6,048,410,
issued in 2000, which covers a method of disposing PVA garments, linens, drapes
and towels; (4) U.S. Patent No. 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; (5) U.S. Patent No. 5,985,443, issued November, 1999, and which
covers the methods of disposing a mop head; (6) U.S. Patent No. 5,885,907,
issued in March, 1999, and covers particular OREX materials configured into a
towel, sponge, or gauze; (7) US Patent 5,650,219, which was issued in 1997 and
covers methods of disposing particular OREX materials configured into garments,
linens, drapes, and towels; (8) U.S. Patent No. 5,207,837, issued in 1993 and
successfully reexamined (B1 5,207,834) by the U.S. Patent Office in 1996, which
covers methods 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;
(9) U.S. Patent No. 5,181,966, issued in 1993 and successfully reexamined (B1
5,181,966) in 1996, and which covers methods of disposing OREX materials
configured into packaging materials; (10) U.S. Patent No. 5,268,222, issued in
1993 and covers composite fabrics made with an OREX materials; (11) U.S. Patent
No. 5,620,786, issued in 1997 and covering particular OREX materials that are
configured into towels, sponges or gauze; (12) U.S. Patent Nos. 5,470,653 and
5,707,731, issued in 1995 and 1998 respectively, and which cover disposable mop
heads made from OREX materials; (13) U.S. Patent No. 5,891,812, issued in April
of 1999, and covering liquid absorbable non-permeable
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fabrics, and methods of making, using and disposing thereof; and (14) U.S.
Patent No. 5,972,039, issued October, 1999, covering methods for enhancing the
absorbency and hand feel of OREX brand fabrics.
The Company also holds several United States Patents relating to
various other technologies, including its Sharps Management System or SMS line
of infectious waste containment systems and its LTS line of closure delivery
systems, including unique absorbent compositions for use therein.
The Company currently has several applications that are pending before
the U.S. Patent and Trademark Office which relate to OREX brand products
including such products used in nuclear and industrial application.
Specifically, those applications concern (i) filteration media, (ii) single use
and limited reuse protection clothing and equipment, (iii) finishing
formulations for OREX materials, (iv) disposal process and processor design for
nuclear contaminated waste, (v) a method of absorbing hydrocarbons with OREX
materials and fabrics, (vi) PVA fabric that is made from the spunlace process,
including PVA spunlaced fabrics that are configured into surgical gowns, drapes,
and industrial wipes, (vii) wipes made from any PVA wipes, (viii) equipment
covers made from OREX, and (ix) PVA fabrics that are coated on both sides for
limited repellency. Additionally, the Company also has a pending application
relating to its MicroBasix processing technology, including: (i) methods for the
treatment of waste streams, and (ii) methods for obtaining volume reduction of
wastes. The Company is not aware of any facts at this time that would indicate
that patents sought by these applications would not be issued; however, no
assurances can be provided that patents will issue from these applications. See
"Risk Factors - Risks Affecting Protection of Technologies."
The Company's current U.S. patent holdings will expire between the
years 2007 and 2020. The Company also typically files for foreign counterpart
patents on those technologies that the Company considers to be material to its
business.
No assurance can be given that the various components of the Company's
technology protection arrangements utilized by the Company to protect its
technologies, including its patents, will be successful in preventing others
from making products competitive with those offered by the Company, including
OREX. See "Risk Factors - Risks Affecting Protection of Technologies".
The Company has registered as trademarks with the U.S. Patent and
Trademark Office "Isolyser", "LTS", "SMS" and "Enviroguard" in the U.S. Patent
and Trademark Office. The Company has filed U.S. applications to register
various marks it uses in its business seeking to commercialize its OREX products
and services in the nuclear power generating industry. Trademark registrations
for "Isolyser", "OREX" and "LTS" have also been granted in various foreign
countries. Microtek maintains registrations of various trademarks that 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" and "-Low Barriers
to Entry for Competitive Products".
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 is aware of a
variety of absorber products that are directly competitive with the Company's
LTS products.
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, these products compete with traditional disposable and
reusable products currently marketed and sold by many companies. 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
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Company's ability to successfully penetrate potential customer accounts. See
"Risk Factors - OREX Commercialization Risks" and "- Competition".
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 - Microtek Regulatory Risks" and
"-OTI Regulatory Risks".
The Company's traditional medical products (including, for example,
equipment drapes) 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. 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 fluid encapsulation and
infectious waste treatment products including LTS-Plus, treatment for
encapsulation and disinfection of suction canister waste, and SMS. LTS-Plus is
registered with the EPA as a chemical device and SMS is registered as a physical
device under FIFRA. LTS-Plus replaced the Company's fluid encapsulation product
LTS in April 2001. In 1998, the EPA announced its position that FIFRA required
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. LTS was not registered with the EPA. Since 1998 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. The Company discontinued the sale of LTS in
8
April 2001 when it was replaced with LTS-Plus. See "Risk Factors - Microtek
Regulatory Risks" and "- Reliance Upon Distributors".
State and local regulations of the Company's products and services are
highly variable. Individual state registration of LTS-Plus is required for just
over half of the states in the United States as a condition to landfill of
treated suction canisters. The rules for disinfecting infectious waste are being
revised on a National Standard. The outcome of the National Standard will play a
very important part in the life of LTS-Plus. In 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 and have also not
given approval for the use of LTS-Plus. While LTS offers benefits unrelated to
landfilling, such action has adversely affected the Company's ability to sell
LTS-Plus. The Company is continuing 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 the prior regulatory actions or pending regulatory reviews will
not continue to have an adverse effect upon the sales of the Company's
sanitizing liquid absorbent products. See "Risk Factors - Microtek 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. The processing of OREX materials contaminated with nuclear
outfall is classified as hazardous which creates significant engineering
challenges. During 2001 the Company acquired the MICROBasix processor and
related technology to address the engineering challenges associated with the
disposal of OREX materials contaminated with nuclear outfall. The operation of
such processor and the disposal of residual by-products resulting from such
operation are subject to governmental regulation. The Company relies upon the
party (namely, ETI) with which it has contracted to process OREX in order to
comply with such governmental regulations. As the Company and ETI begin
processing of OREX on a commercial scale, additional challenges may arise as a
part of the Company's efforts to commercialize these products and 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, 2001, the Company employed 1,584 full-time
employees, eight part-time employees and eight people as independent
contractors. Of these, 70 were employed in marketing, sales and customer
support, 1,348 in manufacturing, 16 in research and development, and 158 in
administrative positions. The Company believes its relationship with its
employees is good.
Insurance
The Company maintains commercial general liability 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
9
insurance will be available at a reasonable cost or that the Company will be
able to maintain adequate levels of liability insurance in the future. In the
event that claims in excess of these coverage amounts are incurred, they could
have a material adverse effect on the financial condition or results of
operations of the Company.
Environmental Matters
The Company is not a party to any material environmental regulation
proceedings alleging that the Company has unlawfully discharged materials into
the environment. The Company does not anticipate the need for any material
capital expenditures for environmental control facilities during the next 18 to
24 months.
Risk Factors
Risks Affecting Microtek and OTI.
History of Net Losses. While the Company reported net income for the
years ended December 31, 2001 and 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 its OREX Degradables products. The Company has significantly
changed its business strategies, including a substantial reduction of its
emphasis on its OREX Degradables business. Past operating failures may adversely
the impact of the valuation of the Company's common stock and the Company's
ability to successfully implement its other business strategies.
Reliance Upon Microtek. Of the Company's $81.0 million in net revenues
for the year ended December 31, 2001, $78.6 million or 97.1% were comprised of
Microtek's net revenues. OTI contributed $2.2 million of the Company's 2001 net
revenues. Of such amount, $1.5 million represented the non-cash amortization of
deferred licensing revenues resulting from the 1999 license and supply agreement
which the Company entered into with Allegiance Healthcare to market OREX
Degradables products and healthcare markets. These non-cash revenues will cease
to accrue in the fourth quarter of 2002, and the Company has ceased its business
operations to commercialize OREX Degradables products in healthcare markets.
Competition. 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. The
Company seeks to sell its OREX Degradables products to the nuclear power
industry, and the Company has virtually no presence in such industry at this
time. Therefore, the Company will be required to displace sales of competitive
products in this industry 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.
Product Liability. The manufacture and sale of the Company's products
entails 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 or
processing systems are alleged to have resulted in injury or other adverse
events, 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".
Stock Price Volatility. The market prices for securities of companies
with a very small market capitalization such as the Company can be highly
volatile. Various factors, including factors that are not related to our
operating performance, may cause significant volume and price fluctuations in
the market, which may limit an investor's liquidity in our common stock and
could result in a loss in the value of such investment.
10
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 Company has only four executive officers, and the loss
of the Company's President or any others of its officers could have a material
adverse effect on the Company. The Company may not be able to attract and retain
a suitable replacement for any of such positions. The Company does not maintain
key man life insurance on any of its executive officers.
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% 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 a group of persons
to obtain control of the Company.
Risks Affecting Microtek.
Low Barriers to Entry for Competitive Products. Most of the Company's
infection control products are not protected by patents, and some of such
infection control products that are protected by patents are subject to
competition from products which may be manufactured or used in a way which does
not infringe upon the Company's patents. In addition, other barriers to entry,
such as manufacturing processes and regulatory approvals, may not prevent the
introduction of products competitive with the Company's infection control
products. The introduction of competitive products or other competitive
marketing strategies, including competitive marketing from companies outside the
United States through the internet, could force the Company to lower it prices
for its products or otherwise adversely affect the Company's operating results.
Potential Erosion of Profit Margins. During 2001, Microtek's gross
margin declined from 41.9% in 2000 to 39.3% in 2001 in part due to relatively
higher OEM product revenues which have slightly lower margins than branded
products. In addition, Microtek does not have a significant number of new
products which it plans to introduce at relatively higher profit margins. For
these and other reasons, Microtek is subject to the risks that it may experience
declining profit margins in the future.
Risks of Completing Acquisitions. Part of Microtek's growth strategy
involves completing strategic acquisitions. The Company's ability to complete
strategic acquisitions is subject to a number of variables outside the control
of the Company including the Company's ability to find attractive and
complementary acquisition opportunities at an attractive cost. Failure to
successfully complete strategic acquisitions on favorable terms may adversely
affect the Company's growth rate.
Small Sales and Marketing Force. The Company's marketing and sales
force consists of 70 individuals including 41 people in sales and 29 people in
marketing. Other companies with which the Company competes have substantially
larger sales forces and greater brand awareness, placing the Company at a
competitive disadvantage. For example, the Company may not be able to reach
certain potential customers due to the Company's inability to have its products
included within certain group purchasing organizations' lists of approved
products.
Reliance upon Distributors. The Company has historically relied on
large distributors for the sale of its branded products in healthcare markets.
Hospitals purchase most of their products from a few large distributors. Of
these distributors, only Allegiance Healthcare and Maxxim Medical accounted for
approximately 16.6% and 10.6% respectively, of the Company's total sales during
2001. 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.
11
Microtek 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 and 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 also requires healthcare companies to
satisfy the quality system regulation. Failure to comply with applicable
regulatory requirements, which may be ambiguous or unclear, can result in fines,
civil and criminal penalties, stop sale orders, loss or denial of approvals and
recalls or seizures of products. There can be no assurance that changes in
existing regulations or the adoption of new regulations will not occur, which
could prevent the Company from obtaining approval for (or delay the approval of)
various products or could affect market demand for the Company's products.
Developments regarding the Company's LTS products have had and could
continue to have a material adverse effect upon the Company's operating results.
In November, 1997, the State of California revoked its approval for direct
landfill disposal (without sterilization) of LTS-treated waste within such
state. In February 1998 the 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.
Risks of Obsolescence. Many companies are engaged in the development of
products and technologies to address the need for safe and cost-effective
prevention of infection in healthcare markets. There can be no assurance that
superior products or technologies will not be developed or that alternative
approaches will not prove superior to the Company's infection control products.
For example, some companies are attempting to develop technologies to sterilize
equipment maintained in the operating room which would compete directly with the
Company's equipment drapes. Any such developments would have a material adverse
effect on the Company's operations and profitability.
Risks affecting the OREX Products and Services.
Reduced OREX Market Potential. During 2001, the Company and Allegiance
jointly agreed to cease further efforts to market the OREX Degradables products
to the healthcare industry. Accordingly, the Company is not making any sales of
OREX products to the healthcare industry, nor is the Company seeking to
commercialize such products in such industry. The Company currently believes
that it will have to reduce its costs to manufacture OREX Degradables products
or the healthcare industry will have to increase the price it is willing to pay
for the Company's OREX Degradables products (such as might occur in the event of
an increase in the cost to dispose of potentially infectious healthcare products
which might be replaced by OREX Degradables) in order to re-introduce the OREX
Degradables products to the healthcare marketplace. If the Company elects to
reenter the healthcare market prior to the expiration in April 2003 of the
Company's exclusive license to Allegiance of OREX Degradables products for use
in healthcare markets, the Company will be required to first offer such
opportunity to Allegiance on terms at least as favorable to Allegiance as those
contained in the Company's prior license and supply agreement with Allegiance.
OREX Commercialization Risks. The Company currently focuses primarily
on the nuclear power industry in its efforts to commercialize it OREX
Degradables products and services. Sales of the Company's products and services
to the nuclear industry during 2001 approximated $200,000. Accordingly, the
Company has only very limited experience in the nuclear industry, and there is
no assurance that the nuclear industry will purchase the Company's products and
services. Among the risks the Company encounters in seeking to commercialize its
products in the nuclear industry are the following:
12
. Commercialization of these products will require the purchaser
and user of these products to change their existing purchasing
patterns;
. Because Isolyser currently has commercially available only a
limited number of OREX Degradable products and therefore
cannot currently replace all traditional products with OREX
Degradables, potential customers may not yet justify a
large-scale conversion to OREX Degradable products;
. To realize the full benefits of OREX Degradables, users of
these products will be required to change the way in which
they dispose of these products by returning such products to
Isolyser's contract processor to incorporate the MICROBasix
dissolution process and disposal procedures;
. Isolyser's sales and marketing force representing the OREX
products and disposal services is limited to very few
individuals at OTI and ETI, some of whom also provide
administrative services;
. Isolyser depends upon its contract processing company, ETI, to
commercialize the disposal service component of the OREX
Degradables product because ETI holds exclusive rights in the
United States and Canada to provide such disposal services
through December 31, 2004, subject to certain performance
related conditions;
. Because ETI is a very small, privately held company with
limited capital resources and personnel, ETI may encounter
difficulties in providing disposal services to users of OREX
Degradables which could adversely affect the Company's
marketing of OREX Degradables products to the nuclear
industry;
. The MICROBasix processor has not been used on a commercial
scale and the Company risks that such processing equipment
will not perform adequately to realize the potential benefits
of OREX Degradables in the nuclear industry;
. While ETI is responsible for obtaining all regulatory
approvals to operate the MICROBasix processor, and while ETI
has advised the Company that it has obtained all such
approvals, difficulties may be encountered in maintaining
existing regulatory approvals in effect and obtaining future
regulatory approvals necessary to process OREX Degradables;
. The Company may have difficulty obtaining a regular supply of
adequate qualities of finished goods OREX Degradable products
having uniformly acceptable performance qualities which may
cause Isolyser to lose customers;
. The Company may have difficulty obtaining an inventory of OREX
Degradables in finished form on acceptable terms and at an
acceptable cost;
. Past concerns with prior OREX Degradables product performance
or future deficiencies in performance of such products may
result in the inability to convert new customers to OREX
Degradables or retain existing customers;
. Competitors may try to sell traditional products to the
nuclear market using aggressive marketing and selling
strategies to protect their market position and discourage the
acceptance of OREX Degradables products and services by the
nuclear market; and
. Long term supply contracts entered into by potential
purchasers of OREX Degradables in the nuclear industry may
prevent such customers from purchasing OREX Degradables.
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
13
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.
OREX 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 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 cost for OREX raw materials has been high relative to raw materials
used in competitive products such as cotton, polyester and nylon. 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.
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 does not have significant experience obtaining large,
commercial quantities of OREX Degradables 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 does not maintain contracts with its suppliers for its OREX Degradables
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.
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 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, or abandonment or reduction
of selling efforts, will not render other inventories of product obsolete,
thereby adversely affecting the Company's financial condition and operating
results.
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.
14
Risks Affecting 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".
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.
OTI Regulatory Risks. 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 or its independent contractors may not be
able to develop satisfactory solutions to regulatory requirements at an
acceptable cost. The Company currently relies upon ETI, its independent
contractor holding exclusive OREX processing rights in the U.S. and Canadian, to
comply with applicable regulations affecting such industry. 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.
ITEM 2. PROPERTIES
The Company maintains approximately 10,800 square feet of office,
manufacturing, production, research and development and warehouse space located
in Norcross, Georgia under a sub-lease agreement which expires January 30,
15
2005. The Company also leases from a local economic development authority a
13,000 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 40,000 square foot warehouse facility. The Company leases
five manufacturing facilities totaling 123,500 square feet located in the
Dominican Republic which expire at various dates through 2007. The Company
leases a 37,700 square foot facility in Tyler, Texas where it manufactures
equipment drapes and materials for other drape converters under a lease which
expires July 31, 2002, subject to two renewal options for five years each. The
Company leases a 7,500 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 5,000 square foot manufacturing and warehouse facility
in Waynesville, North Carolina where it produces prototypes of surgical drapes
under a month-to-month lease.
The Company also leases approximately 69,000 square feet of warehouse
and distribution space in Jacksonville, Florida. The Company uses this facility
for distribution of finished products, distribution of materials to the
Company's Dominican Republic facility and light manufacturing under a lease
expiring April 30, 2003.
Through a subsidiary, the Company leases approximately 9,000 square
feet of space near Manchester, England, approximately 7,000 of which is used for
warehouse space and 2,000 of which is used for office space.
The Company believes that its present facilities are adequate for its
current requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation and legal
proceedings in the ordinary course of business. Such litigation and legal
proceedings have not resulted in any material losses to date, and the Company
does not believe that the outcome of any existing lawsuits will have a material
adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the Company's
shareholders during the three months ended December 31, 2001.
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,
1999.
Common Stock
Quarter Ended High Low
- ------------- ---- ---
2001
First Quarter $1.47 $0.69
Second Quarter $2.60 $0.75
Third Quarter $1.98 $1.09
Fourth Quarter $2.74 $1.35
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
16
On March 15, 2002, the closing sales price for the common stock as
reported by The Nasdaq Stock Market was $2.97 per share.
As of March 15, 2002, the Company had approximately 1,300 shareholders
of record.
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, 2001. During the first
quarter of 2001, the Company acquired the drape and CleanOp product lines of
Deka Medical and acquired the MICROBasix processor equipment and related
technology. In October, 2000, Microtek acquired the urology drape product line
of Lingeman Medical Products, Inc. During 1999, the Company disposed of its
former corporate headquarters, substantially all of the assets of its MedSurg
Industries, Inc. subsidiary and all of its capital stock in its White Knight
Healthcare, Inc. subsidiary, and during 1998 the Company disposed of its Arden
and Charlotte, North Carolina and Abbeville, South Carolina manufacturing
facilities, its industrial and Struble & Moffitt divisions of its White Knight
subsidiary, and substantially all of the net assets of its SafeWaste subsidiary.
The summary historical financial data should be read in conjunction with the
historical consolidated financial statements of the Company and the related
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial data appearing elsewhere in this Form
10-K. The summary historical financial data for each of the five years in the
period ended December 31, 2001 has been derived from the Company's audited
consolidated financial statements.
17
Year Ended December 31,
Statement of Operations Data 1997 1998 1999 2000 2001
(in thousands, except per share data)
Net sales ...................................... $ 159,940 $ 147,643 $ 97,554 $ 53,931 $ 79,470
Licensing revenues ............................. - - 1,500 2,433 1,497
--------- --------- --------- --------- ---------
Total revenues ........................... 159,940 147,643 99,054 56,364 80,967
Cost of goods sold ............................. 142,094 109,936 61,970 35,938 48,497
--------- --------- --------- --------- ---------
Gross profit ............................. 17,846 37,707 37,084 20,426 32,470
Operating expenses
Selling, general and administrative ...... 43,422 40,182 26,596 21,246 25,166
Research and development ................. 2,601 3,906 3,724 4,098 1,644
Amortization of intangibles .............. 3,847 2,052 1,440 1,780 1,520
Impairment charge ........................ 57,310 7,445 769 - -
Restructuring charge ..................... - - - 1,555 -
Gain on dispositions ..................... - - (628) (21) -
--------- --------- --------- --------- ---------
Total operating expenses ............. 107,180 53,585 31,901 28,658 28,330
--------- --------- --------- --------- ---------
(Loss) income from operations ........ (89,334) (15,878) 5,183 (8,232) 4,140
Net other expense .............................. (3,415) (3,223) (1,195) (3,755) (489)
--------- --------- --------- --------- ---------
(Loss) income before tax, extraordinary items
and cumulative effect of change in
accounting principle ........................ (92,749) (19,101) 3,988 (11,987) 3,651
Income tax provision (benefit) ................. 354 540 1,291 155 (1,138)
--------- --------- --------- --------- ---------
(Loss) income before extraordinary item and
cumulative effect of change in accounting
principle ................................... (93,103) (19,641) 2,697 (12,142) 4,789
Extraordinary item (1) ......................... - (1,404) - - -
Cumulative effect of change
in accounting principle (2) ................. 800 - - - -
--------- --------- --------- --------- ---------
Net (loss) income ........................... $ (93,903) $ (18,237) $ 2,697 $ (12,142) $ 4,789
========= ========= ========= ========= =========
Net (loss) income per share - Basic and Diluted
(Loss) income before extraordinary item
and cumulative effect of change in
accounting principle ..................... $ (2.37) $ (0.49) $ 0.07 $ (0.29) $ 0.11
Extraordinary items ...................... - 0.04 - - -
Cumulative effect of change in accounting
principle ............................... (0.02) - - - -
--------- --------- --------- --------- ---------
Net (loss) income per share - Basic and Diluted $ (2.39) $ (0.45) $ 0.07 $ (0.29) $ 0.11
========= ========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding ........ 39,273 39,655 40,318 41,269 41,651
- Basic
Weighted average number of common and
common equivalent shares outstanding
- Diluted ................................... 39,273 39,655 41,158 43,221 41,842
- -----------------
(1) Gives effect to the gain from the extinguishment of debt in 1998.
(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."
18
Year Ended December 31,
--------------------------------------------------------
Balance Sheet Data: 1997(1) 1998(2) 1999 2000 2001
(in thousands)
Working capital ............................. $ 72,408 $ 39,124 $ 44,090 $ 34,372 $ 44,946
Intangible assets, net ...................... 30,803 29,128 23,071 23,057 26,351
Total assets ................................ 144,334 109,518 95,339 76,969 94,330
Long-term debt .............................. 37,546 19,376 4,059 1,673 13,313
Total shareholders' equity .................. 86,117 68,675 74,722 63,598 69,588
(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
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 former White Knight subsidiary, which manufactured and sold
non-woven products primarily to healthcare markets. On July 12, 1999, the
Company sold to Allegiance substantially all of the assets of the Company's
MedSurg Industries subsidiary, which assembled and sold custom procedure trays
to hospitals. On July 12, 1999, the Company also granted to Allegiance an
exclusive worldwide license to the Company's proprietary technologies to
manufacture, use and sell products made from its OREX material for healthcare
applications. In October, 2000, Microtek acquired the urology drape product line
of Lingeman Medical Products, a former customer of Microtek. During first
quarter 2001, the Company acquired the drape and CleanOp product lines of Deka
Medical and acquired the MICROBasix processor equipment and related technology.
Also during 2001, the Company and Allegiance mutually agreed to discontinue
efforts to commercialize the OREX products and technology in the healthcare
market.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net revenues in 2001 were $81.0 million, an increase of $24.6 million
or 43.7 percent over the $56.4 million of net revenues reported in 2000.
Excluding licensing revenues associated with the amortization of the $10.5
million payment by Allegiance allocated to the Company's Supply and License
Agreement with Allegiance, net revenues in 2001 were $79.5 million as compared
to $53.9 million in 2000, an increase of 47.4 percent. The increase in net
revenues is due to Microtek's acquisition of the drape and CleanOp product lines
of Deka Medical in the first quarter of 2001, internal growth in Microtek's core
product revenues, and products newly introduced by Microtek.
For 2001, Microtek's net revenues totaled $78.6 million, an increase of
$26.5 million or 50.9 percent over net revenues of $52.1 million reported in
2000. Microtek's domestic revenues, which were $68.7 million or 87.3 percent of
Microtek's total net revenues in 2001, increased by $22.3 million or 47.9
percent over 2000. Microtek's domestic revenues are generated through two
primary channels or customer categories, hospital branded and contract
manufacturing (commonly referred to as OEM). Hospital branded revenues were 55.3
percent and OEM revenues were 44.7 percent of total domestic revenues in 2001 as
compared to 72.1 percent and 27.9 percent, respectively, in 2000. Hospital
branded revenues in 2001 increased by $4.5 million to $38.0 million from $33.5
million in 2000. The single most significant contributor to the increase in
hospital branded revenues was the CleanOp product line acquired from Deka
Medical. Additionally, Microtek's core hospital branded revenues demonstrated
internal growth in 2001 of greater than 10 percent. OEM revenues in 2001
increased by $17.8 million to $30.7 million from $12.9 million in 2000. The
significant contributors to the increase in OEM revenues in 2001 were sales of
the angiography drape products acquired from Deka Medical and internal growth of
greater than 10 percent.
19
Microtek's international revenues, which accounted for the remaining
12.7 percent of its 2001 net revenues, strengthened in the latter half of the
year to reach $9.9 million for the year, an increase of $4.2 million or 74.3
percent over 2000. The improvements in 2001 are attributable to international
revenues stemming from the Deka Medical acquisition and internal growth in
excess of 10 percent.
OTI's net revenues were $2.2 million in 2001, approximately $1.9
million less than 2000. Licensing revenues in 2001 were $1.5 million as compared
to $2.4 million in 2000. The reduction in OTI's net revenues in 2001 is due to
this non-cash reduction in licensing revenues in 2001 of $900,000 and lower
healthcare and automotive product sales. OTI will cease to recognize the
non-cash licensing revenues in December 2002. The declines in OTI's product
sales reflect in part the Company's increased focus on the more profitable
Microtek business and the cessation of marketing efforts with respect to OTI's
products and services in the healthcare and automotive industries. Slightly
offsetting the above noted declines were OTI's first significant revenues in the
nuclear power industry of approximately $200,000 during 2001. The Company's
commercialization efforts and relationships within the nuclear power industry
continue to strengthen with continued favorable customer response to product
usage of the OREXTM protective clothing.
Gross margins in 2001 were 40.1 percent, as compared with 36.2 percent
for 2000. The 2000 margins were negatively impacted by a $3.5 million OTI
inventory impairment charge recorded in the fourth quarter of 2000. Excluding
the impact of this impairment charge, the 2000 gross margins would have been
42.4 percent. Microtek's gross margin declined slightly from 41.9 percent in
2000 to 39.3 percent in 2001 as a result of relatively higher OEM product
revenues which have slightly lower margins than branded products, costs incurred
in the first three quarters of the year related to transitioning production from
Microtek's former plant in Mexico to its facility in the Dominican Republic, and
costs to integrate the product lines acquired from Deka Medical.
Operating expenses as a percentage of net revenues in 2001 were 35.0
percent, down from 50.8 percent in 2000. Included in operating expenses for 2000
are $1.6 million of restructuring charges recorded in 2000.
Selling, general and administrative expenses were $25.2 million or 31.1
percent of net revenues in 2001, versus $21.2 million or 37.7 percent of net
revenues for 2000. The overall increase in the absolute dollar amount of
selling, general and administrative expenses is due in part to product lines
acquired from Deka Medical and increases in variable selling costs resulting
from increased net revenues in 2001. The improvements in selling, general and
administrative expenses as a percentage of net revenues in 2001 result from
increased revenues in 2001 and cost control and expense reduction efforts,
particularly in corporate overhead expenses, begun in the fourth quarter of
2000.
Microtek's operating expenses, which include corporate administrative
expenses, as a percentage of net revenues decreased to 31.5 percent for 2001
from 39.3 percent in 2000. This improvement as a percentage of net revenues is
directly attributable to increased revenues and corporate cost reductions
implemented during 2001 and to the impact of a fourth quarter 2000 charge of
$711,000 for plant closures and severance packages. OTI's operating expenses in
2001 decreased by $4.7 million or 59.0 percent from 2000. Included in OTI's
operating expenses for 2000 was approximately $844,000 in restructuring and
impairment charges. The improvements in operating expenses result from the
impact of the 2000 restructuring and impairment charges, together with OTI's
focus during 2001 on cost reductions.
Research and development expenses were $1.6 million in 2001 as compared
to $4.1 million in 2000. Significant reductions in product development costs in
2001 have resulted in savings of $2.5 million in research and development
expenses as compared to 2000. This reduction in research and development
expenses reflects the Company's more narrow focus on new market opportunities,
for example the nuclear power industry for its OREX Degradable products.
Amortization of intangibles in 2001 was $1.5 million, a decrease of
$260,000 from amortization expenses in 2000. This decrease results from the
effect of the write-off in 2000 of intangible assets related to operations that
were disposed of which was partially offset by increased amortization in 2001
with respect to intangible assets acquired in the Deka and MICROBasixTM
acquisitions during the first quarter of 2001.
20
Income from operations for 2001 was $4.1 million, versus a loss from
operations of $8.2 million in 2000. For 2001, Microtek's operating profit in
2001 was $6.2 million, a 361.5 percent increase over the operating profit of
$1.3 million recorded in 2000. The operating losses recorded by the Company's
OTI division in 2001 were $1.8 million, which represents an 80.5 percent
improvement over the $9.4 million in operating losses recorded in 2000.
Interest expense, net of interest income, was $489,000 in 2001 as
compared to interest income, net of interest expense, of $349,000 in 2000. The
increase in net interest expense is the result of higher interest expense in
2001 and lower interest income on cash and cash equivalents which are
attributable to borrowings on the Company's line of credit facility in 2001 and
lower cash balances as a result of the 2001 acquisitions.
The Company's provision for income taxes in 2001 reflects a net income
tax benefit of approximately $1.1 million which is comprised of a $1.5 million
benefit related to the decrease in the Company's valuation allowance with
respect to certain of its deferred tax assets, principally its net operating
loss carryforwards, and the offsetting state and foreign income tax provision
for 2001 of approximately $413,000.
The resulting net income for 2001 was $4.8 million, or $0.11 per basic
and diluted share. This result reflect significant improvement over the net
losses of $12.1 million, or $.29 per basic and diluted share reported for 2000,
which included impairment and restructuring charges totaling $9.1 million.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net revenues in 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 percent from net revenues in 1999.
Included in 2000 revenues are $2.4 million of licensing revenues
associated with the amortization of the $10.5 million payment by Allegiance
Healthcare allocated to the Company's Supply and License Agreement with
Allegiance Healthcare. During 2000, 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. License revenues in 1999 were $1.5 million.
Sales of Microtek products decreased 9.7 percent to $52.1 million
during 2000 as compared to $57.7 million during 1999. This decease was primarily
a result of increased sales in 1999 from a short-term manufacturing contract
arrangement with Allegiance as well as continuing reductions in purchases of
safety products by Allegiance Healthcare during 2000. Excluding the
non-recurring business with Allegiance Healthcare in 1999, Microtek sales
increased 0.8 percent from $51.7 million in 1999 to $52.1 million in 2000.
In 2000, Microtek's domestic revenues totaled $46.4 million, or 89.1
percent of Microtek's total net revenues for the year, a decrease of $4.5
million or 8.8 percent from the $50.9 million recorded in 1999. Microtek's 2000
domestic revenues were generated through two primary channels or customer
categories, hospital branded and contract manufacturing (commonly referred to as
OEM). Hospital branded revenues were 72.1 percent and OEM revenues were 27.9
percent of total domestic revenues in 2000, as compared to 63.5 percent and 36.5
percent, respectively, in 1999. Hospital branded revenues in 2000 increased by
approximately $1.2 million to $33.5 million from $32.3 million in 1999. This
increase is due primarily to the net effect of higher hospital sales and lower
safety product sales in 2000. 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 Allegiance Healthcare, the largest
distributor of such products, and 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.
OEM revenues decreased by $5.7 million in 2000 to $12.9 million from $18.6
million in 1999 primarily due to the one-time manufacturing contract arrangement
with Allegiance Healthcare in 1999 described above. Microtek's acquisition of
the urology drape product line of Lingeman Medical Products in 2000 did not have
a material impact on Microtek's operating results because Lingeman Medical
Products was formerly an OEM private label customer of Microtek.
21
Microtek's international revenues, which accounted for the remaining
10.9 percent of its 2000 net revenues, totaled $5.7 million, as compared to $6.8
million or 11.8 percent of its 1999 net revenues. The decline in international
revenues in 2000 is attributable to weakening market conditions, a change in
international sales channels and increased competitive and pricing pressures
abroad which adversely impacted Microtek's net revenues.
OTI's net revenues totaled $4.0 million in 2000 as compared to $2.7
million in 1999, an increase of 50.9 percent. Excluding license revenues, OTI's
net revenues in 2000 and 1999 were $1.6 million and $1.2 million, respectively,
an increase of 36.6 percent. Sales of OREX Degradables in 2000 did not
contribute any gross profit to the Company's operating results.
Gross profit in 2000 was $20.4 million or 36.2 percent of net revenues
compared to $37.1 million or 37.4 percent of net revenues in 1999. Excluding
gross profits from the amortization of licensing revenues, gross margin was 33.4
percent in 2000 as compared to 36.5 percent 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.
Microtek's gross margins declined from 46.0 percent in 1999 to 41.9 percent in
2000. This decline was primarily attributable to reduced efficiencies resulting
from the termination of a short-term manufacturing contract arrangement with
Allegiance Healthcare in 1999.
Operating expenses as a percentage of net revenues in 2000 were 50.8
percent as compared to 32.2 percent in 1999. 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 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.
Selling, general and administrative expenses were $21.2 million or 37.7
percent of net sales in 2000 as compared to $26.6 million or 26.8% of net sales
in 1999. The decrease in the absolute dollar amount of selling, general and
administrative expenses is due to operations sold during 1999, partially offset
by a $3.2 million increase in these expenses incurred with respect to the
Company's continuing operations. Expense categories with significant increases
included legal, audit and tax services, consulting and investor relations.
Additionally, the Company incurred higher distribution freight expense due to
rising fuel costs.
Microtek's operating expenses, which include corporate administrative
expenses, totaled $20.5 million, or 39.3 percent of Microtek's net revenues in
2000, as compared to $16.5 million in 1999, or 30.1 percent of Microtek's net
revenues. The increases in the absolute dollar amount of operating expenses and
in operating expenses as a percentage of net revenues are attributable to higher
corporate administrative costs in 2000, the fourth quarter 2000 charge of
$711,000 related to plant closures and severance packages and lower net revenues
in 2000. OTI's operating expenses in 2000 totaled $8.0 million, a $3.0 million
increase over the $5.0 million recorded in 1999. The increase in 2000 was
comprised of $1.3 million in additional selling, general and administrative
costs, $609,000 in additional amortization of intangibles related to operations
that were disposed of, and $330,000 in additional research and development
costs. Also included in the 2000 amount were restructuring and impairment
charges of $844,000.
Research and development expenses were $4.1 million in 2000 as compared
to $3.7 million in 1999. Included in the increased research and development
expenditures were costs for accelerated development of manufacturing 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 percent of net
sales in 2000. This compares to $1.4 million or 1.5 percent 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.
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.
22
Interest income, net of interest expense, in 2000 was $349,000 as
compared to net interest expense of $1.2 million in 1999. The decline in net
interest expense was primarily attributable to the elimination of the Company's
outstanding balance in its revolver and term loan facility from proceeds of
divestitures coupled with higher interest income on the Company's cash and cash
equivalents.
During 2000, the Company decided to discontinue additional investment
in Thantex Specialties and concluded that the recovery of the investment was
unlikely. Accordingly, the investment was written off in 2000. The write-off of
this investment amounted to $4.1 million, which included a $500,000 note
receivable from Thantex.
The Company's provision for income taxes was $155,000 for 2000 compared
to $1.3 million in 1999. Due to the Company's federal net operating loss
carryforwards, the Company's 2000 income tax provision is comprised primarily of
state and foreign income taxes.
The resulting net loss for 2000 was $12.1 million, or $0.29 per basic
and diluted share as compared to net income of $2.7 million, or $.07 per basic
and diluted share, in 1999.
Liquidity and Capital Resources
As of December 31, 2001, the Company's cash and cash equivalents
totaled $10.6 million compared to $14.4 million at December 31, 2000.
During 2001, the Company utilized cash to finance the purchase of the
drape and CleanOp product lines from Deka Medical and certain OREXTM processing
equipment and related technology from MICROBasix LLC, to purchase other property
and equipment, to make scheduled debt repayments related to previous
acquisitions of businesses, to make payments under equipment and capital leases,
and to fund working capital requirements. For 2001, net cash used in operating
activities was $2.5 million; net cash used in investing activities was $13.4
million and net cash provided by financing activities was $12.1 million. The
$2.5 million used in operating activities in 2001 results principally from the
Company's significant increases in inventories and accounts receivable resulting
from increased sales and the Deka Medical transaction. Also contributing to the
use of cash in operating activities in 2001 were the decreases in accounts
payable and the increases in prepaid expenses and other assets, which were
partially offset by increases in accrued compensation and other liabilities.
During 2001, cash used in investing activities included acquisition costs of
$11.6 million for the drape and CleanOp product lines from Deka Medical and
$675,000 for certain OREXTM processing equipment and related technology from
MICROBasix LLC. Also during 2001, the Company invested $1.1 million in capital
property and equipment, an amount comparable to the $1.1 million expended in
2000. The 2001 expenditures were primarily associated with the Company's
expanded manufacturing operations in the Dominican Republic following the Deka
Medical acquisition and investments to improve the Company's internal management
information systems. 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, and invested $249,000 in Consolidated EcoProgress
and $44,000 in Global Resources, Inc. Cash provided by financing activities in
2001 was $12.1 million as compared to cash used in financing activities of $1.3
million in 2000. In 2001, borrowings under the Company's credit agreement
provided $12.4 million, and proceeds from the exercise of stock options provided
$820,000. Repayments of notes payable in 2001 totaled $778,000, and the Company
repurchased 213,500 shares of common stock in 2001 for an aggregate amount of
$343,000. In 2000, the Company repaid notes payable totaling $3.1 million,
repurchased 496,000 shares of common stock for an aggregate of $898,000, and
generated $2.0 million in proceeds from the exercise of stock options.
The Company maintains a credit agreement (as amended to date, the
"Credit Agreement") with The Chase Manhattan Bank (the "Bank"), consisting of a
$17.5 million revolving credit facility, maturing on June 30, 2004. Borrowing
availability under the revolving credit facility is based on the lesser of (i) a
percentage of eligible accounts receivable and inventory or (ii) $17.5 million,
less any outstanding letters of credit issued under the Credit Agreement.
Current borrowing availability under the revolving facility at December 31, 2001
was $1.9 million. Revolving credit borrowings bear interest, at the Company's
option, at either a floating rate approximating the Bank's prime rate plus an
interest margin (5.25% at December 31, 2001) or LIBOR plus an interest margin
(4.16% at December 31, 2001). There was $12.4 million of outstanding borrowings
under the revolving credit facility at December 31, 2001, and no outstanding
borrowings under the revolving credit facility at December 31, 2000. On March
15, 2002, outstanding borrowings under the revolving credit facility were $9.7
million and borrowing
23
availability was $4.4 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, 2001 or 2000. The Credit Agreement provides for a fee of
0.375% per annum on the unused commitment, an annual collateral monitoring fee
of $35,000, 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, 2001, the Company was in compliance with all
of its financial covenants under the Credit Agreement.
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 August 2002. The Company prepaid its remaining purchase obligation
under this contract is at a discounted amount in first quarter 2002.
During 2001, 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 2002. However,
currently unforeseen future developments and increased working capital
requirements may require additional debt financing or issuances of common stock
in 2002 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, 2001. Export sales by the Company during 2001
were $9.9 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.
Critical Accounting Policies.
While the listing below is not inclusive of all of the Company's
accounting policies, the Company's management believes that the following
policies are those which are most critical and embody the most significant
management judgments and the uncertainties affecting their application and the
likelihood that materially different amounts would be reported under different
conditions or using different assumptions. These critical policies are:
Revenue Recognition. The Company's revenues are derived from the
sale of its products and are recognized at the time of shipment (i) when
persuasive evidence of a sale arrangement exists, (ii) delivery has occurred,
(iii) the price is fixed and determinable, and (iv) collectibility of the
associated receivable is reasonably assured. As discussed below, significant
management judgments and estimates must be made and used in connection with the
revenue recognized in any accounting period. Material differences may result in
the amount and timing of the Company's revenues for any period if management
made different judgments or utilized different estimates.
All sales of the Company's products are evidenced by a binding
purchase order as evidence of a sale arrangement. Sales through the Company's
distributors are evidenced by a master agreement which governs the
24
relationship together with a binding purchase order on a transaction by
transaction basis. Delivery generally occurs when the Company's products are
delivered to a common carrier.
At the time of a sale transaction, the Company assesses whether the
related sales price is fixed and determinable based on the payment terms
associated with the transaction. Sales prices due within the Company's normal
payment terms, which are 30 to 60 days from the invoice date for its domestic
customers and 90 to 120 days from the invoice date for international customers,
are considered fixed and determinable. The Company does not generally extend
payment terms outside its normal guidelines. The Company also assesses whether
collection is reasonably assured at the time of the sale transaction based on a
number of factors, including past transaction history with the customer and the
credit-worthiness of the customer.
Sales Returns and Other Allowances and Allowance for Doubtful
Accounts. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets 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. Specifically, management must make estimates of potential
future product returns related to current period product revenues. The Company's
sales arrangements do not generally include acceptance provisions or clauses.
Additionally, the Company does not typically grant its distributors or other
customers price protection rights or rights to return products bought, other
than normal and customary rights of return for defects in materials or
workmanship, and is not obligated to accept product returns for any other
reason. Actual returns have not historically been significant. Management
analyzes historical returns, current economic trends and changes in customer
demand when evaluating the adequacy of its sales returns and other allowances.
Similarly, the Company's management must make estimates of the
uncollectibility of its accounts receivables. Management specifically analyzes
accounts receivable, historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and changes in its customers' payment
terms when evaluating the adequacy of its allowance for doubtful accounts. The
Company's accounts receivables at December 31, 2001 totaled $16.1 million, net
of the allowance for doubtful accounts of $894,000.
Inventory Valuation. The preparation of the Company's financial
statements requires careful determination of the appropriate dollar amount of
the Company's inventory balances. Such amount is presented as a current asset in
the Company's balance sheet and is a direct determinant of cost of goods sold in
the statement of operations and therefore has a significant impact on the amount
of net income reported in an accounting period. The basis of accounting for
inventories is cost, which is the sum of expenditures and charges, both direct
and indirect, incurred to bring the inventory quantities to their existing
condition and location. The Company's inventories are stated at the lower of
cost or market, with cost determined using the first-in, first-out ("FIFO")
method, which assumes that inventory quantities are sold in the order in which
they are manufactured or purchased. The Company utilizes standard costs as a
management tool. The Company's standard cost valuation of its inventories is
adjusted at regular intervals to reflect the approximate cost of the inventory
under FIFO. The determination of the indirect charges and their allocation to
the Company's work-in-process and finished goods inventories is complex and
requires significant management judgment and estimates. Material differences may
result in the valuation of the Company's inventories and in the amount and
timing of the Company's cost of goods sold and resulting net income for any
period if management made different judgments or utilized different estimates.
On a periodic basis, management reviews its inventory quantities on
hand for obsolescence, physical deterioration, changes in price levels and the
existence of quantities on hand which may not reasonably be expected to be used
or sold within the normal operating cycles of the Company's operations. To the
extent that any of these conditions are believed to exist or the utility of the
inventory quantities in the ordinary course of business is no longer as great as
their carrying value, a reserve against the inventory valuation is established.
To the extent that this reserve is established or increased during an accounting
period, an expense is recorded in the Company's statement of operations,
generally in cost of good sold. Significant management judgment is required in
determining the amount and adequacy of this reserve. In the event that actual
results differ from management's estimates or these estimates and judgments are
revised in future periods, the Company may need to establish additional reserves
which could materially impact the Company's financial position and results of
operation.
As of December 31, 2001, the Company's inventories totaled $27.0
million, net of reserves for slow moving and obsolete inventories of $2.0
million. Management believes that the Company's inventory valuation,
25
together with the recorded reserves for slow moving and obsolete inventories,
results in carrying the inventory at the lower of cost or market.
Accounting for Income Taxes. In conjunction with preparing the
Company's consolidated financial statements, management is required to estimate
the Company's income tax liability in each of the jurisdictions in which the
Company operates. This process involves estimating the Company's actual current
tax exposure together with assessing temporary differences resulting from
differing treatment of items, such as goodwill amortization, for tax and
accounting purposes. These differences result in deferred tax assets or
liabilities which are reflected in the Company's consolidated balance sheet.
Management must also assess the likelihood that the Company's deferred tax
assets will be recovered from future taxable income. To the extent that
management believes that recovery is not likely, a valuation allowance must be
established and reviewed in each accounting period. Increases in the valuation
allowance in an accounting period requires that the Company record an expense
within its tax provision in its consolidated statement of operations.
Significant management judgment is required in determining the
Company's provision for income taxes, its deferred tax assets and liabilities
and any valuation allowance recorded against the Company's net deferred tax
assets. At December 31, 2001, the Company's net deferred tax assets totaled $2.0
million. The Company has recorded a valuation allowance of $40.4 million as of
December 31, 2001, due to uncertainties related to the Company's ability to
utilize some of its deferred tax assets, primarily consisting of net operating
loss carryforwards, before they expire. The valuation allowance is based on
management's estimates of taxable income by jurisdiction in which the Company
operates and the period over which the deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or these estimates
are adjusted in future periods, the Company may need to adjust this valuation
allowance which could materially impact the Company's financial position and
results of operation.
Valuation of Long-Lived and Intangible Assets and Goodwill. The
Company assesses the impairment of identifiable intangibles, long-lived assets
and related goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable based on estimates of future
undiscounted cash flows. Factors that are considered by management in performing
this assessment include, but are not limited to, the following:
. The Company's performance relative to historical or projected
future operating results;
. The Company's intended use of acquired assets or the Company's
strategy for its overall business; and
. Industry or economic trends.
In the event that the carrying value of intangibles, long-lived
assets and related goodwill is determined to be impaired, such impairment is
measured using a discount rate determined by management to be commensurate with
the risk inherent in the Company's current business model. Net intangible
assets, long-lived assets and goodwill, including property and equipment,
amounted to $33.9 million as of December 31, 2001.
As discussed below, on January 1, 2002, the Company implemented
Statement of Financial Account Standard ("SFAS") No. 142, Goodwill and Other
Intangible Assets, and as a result, will cease to amortize approximately $22.5
million of goodwill but will continue to amortize other intangible assets.
Goodwill amortization expense recorded during 2001 amounted to approximately
$1.1 million. In lieu of amortization, the Company will be required to perform
an initial impairment review of its goodwill in 2002 and an impairment review
thereafter at least annually. The Company expects to complete its initial
impairment review prior to reporting its operating results for the first quarter
of 2002 and currently does not expect to record an impairment charge upon
completion of this review. However, there can be no assurance that a material
impairment charge will not be recorded at the time that this review is
completed.
Newly Issued Accounting Standards.
In July 2001, the Financial Accounting Standards Board issued SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting and eliminates the use of the
pooling-of-interests method. The application of SFAS 141 did not affect any of
the Company's previously reported amounts included in goodwill or other
intangible assets. SFAS 142 requires that the amortization of goodwill cease
prospectively upon adoption and instead, the carrying value of goodwill be
evaluated using an impairment approach. Identifiable
26
intangible assets will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS 142 is effective for fiscal years beginning after December 15, 2001, and
was implemented by the Company on January 1, 2002. Beginning in 2002, the
Company expects to discontinue amortizing goodwill but will continue to amortize
other long-lived intangible assets. At December 31, 2001, goodwill approximated
$22.5 million and other intangible assets approximated $3.9 million. Goodwill
amortization in 2001 was approximately $1.1 million, or $.02 per share. The
Company is currently evaluating the impact of the adoption of SFAS 142 on its
consolidated financial statements.
Additionally, in August 2001, the FASB issued SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Although SFAS 144 supersedes
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains most of the concepts of that standard,
except that it eliminates the requirement to allocate goodwill to long-lived
assets for impairment testing purposes and it requires that a long-lived asset
to be abandoned or exchanged for a similar asset be considered held and used
until it is disposed (i.e., the depreciable life should be revised until the
asset is actually abandoned or exchanged. Also, SFAS 144 includes the basic
provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for presentation of discontinued operations in the income
statement but broadens that presentation to include a component of an entity
rather than a segment of a business, where that component can by clearly
distinguished from the rest of the entity. The provisions of SFAS 144 generally
are to be applied prospectively. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company is currently evaluating the impact of the adoption of SFAS 144 on the
Company's consolidated financial statements.
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, the likelihood of future impairment charges 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 the
commercialization of the Company's OREX Degradables products, manufacturing and
supply risks, risks concerning the protection of the Company's technologies,
risks of technological obsolescence, reliance upon distributors, regulatory
risks, product liability and other risks described in this Annual Report on Form
10-K. See "Business - Risk Factors".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operating results and cash flows are subject to
fluctuations from changes in interest rates and foreign currency exchange rates.
The Company's cash and cash equivalents are short-term, highly liquid
investments with original maturities of three months or less consisting entirely
of U.S. Government securities or government backed securities. These investments
are classified in accordance with SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, as available for sale securities and are stated
at cost, which approximates market. As a result of the short-term nature of the
Company's cash and cash equivalents, a change of market interest rates does not
impact the Company's operating results or cash flow.
The assets and liabilities of the Company's United Kingdom subsidiary
are translated into U.S. dollars at current exchange rates and revenues and
expenses are translated at average exchange rates. The effect of foreign
currency translations was not material to the Company's results of operations
for the year ended December 31, 2001. 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.
27
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, 2001, the Company had long-term debt
totaling $12.9 million that bears interest at (i) a floating rate approximating
the Prime Rate or (ii) LIBOR. Because these rates are variable, an increase in
interest rates would result in additional interest expense and a reduction in
interest rates would result in reduced interest expense.
The Company does not use any derivative instruments to hedge its
interest rate expense. The Company does not use derivative instruments for
trading purposes and the use of such instruments would be subject to strict
approvals by the Company's senior officers. Therefore, the Company's exposure
related to such derivative instruments is not expected to be material to the
Company's financial position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are listed
under Item 14(a) and filed as part of this report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The current directors and executive officers of the Company are as
follows:
Name Position
---- --------
Gene R. McGrevin Chairman of the Board of Directors
Dan R. Lee President and Chief Executive Officer, Director
J. Michael Mabry Executive Vice President and Secretary
Donald E. McLemore Executive Vice President
Roger G. Wilson Chief Financial Officer and Assistant Secretary
Rosdon Hendrix Director
Kenneth F. Davis Director
John E. McKinley Director
Ronald L. Smorada Director
28
Gene R. McGrevin (age 59) 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 54) 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.
Roger G. "Jerry" Wilson (age 57) 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.
J. Michael Mabry (age 39) 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 President and Chief Executive Officer, as
Chief Operating Officer of Microtek, as Chairman of MindHarbor, a technology
services provider, and as President and 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 51) 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.
Rosdon Hendrix (age 62) 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 50) 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 58) 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
29
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 55) 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.
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 2001, all of its
executive officers (including the Named Executive Officers), directors and
persons owning more than 10% of its common stock complied with the Section 16(a)
requirements, except Mr. Wilson filed a report on a purchase of shares of the
Company's common stock 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 each of the other
executive officers of the Company serving at December 31, 2001 other than such
chief executive officer (collectively, the "Named Executive Officers").
30
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 2001 $248,558 $209,156 - 250,000 $18,116(1)
President and Chief Executive 2000 $174,634 $ 53,813 - 50,000 $11,894(2)
Officer 1999 $162,000 $127,044 - 35,081 $ 7,319(3)
J. Michael Mabry 2001 $150,000 $ 83,663 - 50,000 $ 5,877(4)
Executive Vice President and 2000 $162,500 $ 8,250 - - $ 6,554(5)
Secretary 1999 $152,885 $130,800 - 150,000 $ 5,968(6)
2001 $156,346 - - - $ 6,339(7)
Donald E. McLemore 2000 $146,538 $ 8,250 - 145,000 $24,804(8)
Executive Vice President 1999 $ 39,000(9) - - 25,000 $2,251(10)
2001 $149,519 $ 83,663 - 125,000 $6,239(11)
Roger G. Wilson 2000 $121,539 $ 25,625 - 25,000 $5,120(12)
Chief Financial Officer 1999 $102,809 $ 44,167 - 5,000 $4,104(13)
(1) This amount represents $9,942 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 $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.
(3) 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.
(4) This amount represents $5,769 in contributions to a 401(k) plan and
$108 for a $100,000 term life insurance policy.
(5) This amount represents $6,500 in contributions to a 401(k) plan and $54
for a $100,000 term life insurance policy.
(6) This amount represents $5,908 in contributions to a 401(k) plan and $60
for a $100,000 term life insurance policy.
(7) This amount represents $6,042 in contributions to a 401(k) plan and
$297 for a $100,000 term life insurance policy.
(8) This amount represents $18,804 in reimbursements paid for relocation of
residence, $5,862 in contributions to a 401(k) plan and $138 for a
$100,000 term life insurance policy.
(9) This amount represents compensation paid from September 8, 1999, the
date Dr. McLemore became an employee of the Company.
(10) This amount represents $2,251 in reimbursements paid for relocation of
residence.
(11) This amount represents $5,981 in contributions to a 401(k) plan and
$258 for a $100,000 term life insurance policy.
31
(12) This amount represents $4,862 in contributions to a 401(k) plan and
$258 for a $100,000 term life insurance policy.
(13) This amount represents $4,104 in contributions to a 401(k) plan.
Employment Arrangements
Messrs. Lee and McLemore are not parties to employment agreements with
the Company.
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.
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
32
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 15, 2002, options to purchase 1,953,320 shares of common
stock were outstanding under the 1992 Stock Option Plan and approximately
314,198 shares of common stock were available for future awards under that Plan
prior to its expiration on April 27, 2002. The expiration of the 1992 Stock
Option Plan does not affect options outstanding under that Plan.
1999 Stock Option Plan. In March 1999 the Board approved and in May
1999 the Company's shareholders ratified, the adoption of the Company's 1999
Long-Term Incentive Plan (the "1999 Stock Option Plan"). The 1999 Stock Option
Plan currently provides for the issuance of options and other stock awards to
acquire shares of common stock up to a maximum of 1,200,000 shares (subject to
appropriate adjustment in the event of stock splits, stock dividends and other
similar dilutive events). Options and other stock awards may be granted under
the 1999 Stock Option Plan to employees of the Company and certain subsidiaries
and affiliated businesses, and to directors, consultants and other persons
providing key services to the Company.
The Compensation Committee of the Board of Directors will determine the
terms and conditions of options granted under the 1999 Stock Option Plan,
including the exercise price, which generally may not be less than the fair
market value of the Company's common stock on the date of grant. Awards under
the 1999 Stock Option Plan may be settled through cash payments, the delivery of
shares of common stock, or a combination thereof as the Committee shall
determine. Stock options awarded under the 1999 Stock Option Plan which are
intended to be incentive stock options are subject to the same restrictions
described above with respect to the 1992 Stock Option Plan.
The 1999 Stock Option Plan may be terminated or amended by the Board of
Directors at any time, except that the following actions may not be taken
without shareholder approval: (a) increasing the number of shares that may be
issued under the 1999 Stock Option Plan (except for certain adjustments provided
for under the 1999 Stock Option Plan), or (b) amending the 1999 Stock Option
Plan provisions regarding the limitations on the exercise price. In the event of
a change of control (as defined generally to include the acquisition by an
individual, entity or group of more than 15% of the outstanding common stock of
the Company, a merger or consolidation of the Company or a sale by the Company
of all or substantially all of the Company's assets), any award granted under
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 15, 2002, options to purchase 1,153,000 shares of common
stock were outstanding under the 1999 Stock Option Plan and approximately 47,000
shares of common stock were available for future awards under the 1999 Stock
Option Plan.
Employee Stock Purchase Plan. In March 1999 the Board approved and in
May 1999 the Company's shareholders ratified, the adoption of the Company's
Employee Stock Purchase Plan for employees of the Company and its subsidiaries
(the "1999 Stock Purchase Plan"). The 1999 Stock Purchase Plan was established
pursuant to the provisions of Section 423 of the Code to provide a method
whereby all eligible employees of the Company may acquire a proprietary interest
in the Company through the purchase of common stock. Under the 1999 Stock
Purchase Plan payroll deductions are used to purchase the Company's common
stock. An aggregate of 700,000 shares of common stock of the Company were
reserved for issuance under the 1999 Stock Purchase Plan. Through December 31,
2001, a total of 274,079 shares of common stock had been purchased under such
plan, leaving 425,921 shares of common stock available for issuance under such
plan in the future.
33
Stock Options
The Company granted options to its Named Executive Officers in 2001 as
set forth in the following table. The Company has no stock appreciation rights
("SARs") outstanding.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
----------------------------------------------------------
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 Term(1)
Options/SARs Employees in Price Expiration --------------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- -------------------- ------------- -------------- ----------- ------------ --------------- ---------------
Dan R. Lee 250,000 19.5% $1.66 05/16/11 $260,991 $661,403
J. Michael Mabry 50,000 3.9% $1.66 05/16/11 $ 52,198 $132,281
Roger G. Wilson 125,000 9.8% $1.66 05/16/11 $130,496 $330,702
- ------------------
(1) These amounts represent certain assumed rates of appreciation
only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock and
overall market conditions.
The following table sets forth the value of options exercised during
2001 and of unexercised options held by the Company's Named Executive Officers
at December 31, 2001.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
Dan R. Lee - - 156,820/305,041 $ 52,116/$496,806(1)
J. Michael Mabry - - 176,084/144,441 $259,347/$275,700(2)
Donald E. McLemore - - 48,750/121,250 $ 75,938/$227,813(3)
Roger G. Wilson - - 18,750/151,250 $ 35,547/$246,485(4)
- ------------------
34
(1) The indicated value is based on exercise prices ranging from $1.1875
to $3.49 per share on 165,591 exercisable options and exercise prices
ranging from $1.1875 to $2.125 on 296,270 unexercisable options, and
a value per share on December 31, 2001 of $2.55.
(2) The indicated value is based on exercise prices ranging from $1.25 to
$3.375 per share on 213,584 exercisable options and exercise prices
ranging from $1.25 to $2.2813 on 106,941 unexercisable options, and a
value per share on December 31, 2001 of $2.55.
(3) The indicated value is based on exercise prices ranging from $2.25 to
$4.188 per share on 48,750 exercisable options and exercise prices
ranging from $2.25 to $4.188 on 121,250 unexercisable options, and a
value per share on December 31, 2001 of $2.55.
(4) The indicated value is based on exercise prices ranging from $1.1875
to $2.2813 per share on 20,000 exercisable options and exercise
prices ranging from $1.1875 to $2.2813 on 150,000 unexercisable
options, and a value per share on December 31, 2001 of $2.55.
Director Compensation
In consideration of Mr. McGrevin's agreement to serve as Chairman
effective upon the immediately preceding Chairman's resignation, the Chairman
received a retainer at the rate of $100,000 for the period beginning December 1,
2000 through June 30, 2001. Beginning July 1, 2001, such retainer adjusted to
the rate of $48,000 per year. In December 2001, the Board authorized the
increase in Mr. McGrevin's retainer to $75,000 per year, beginning on January 1,
2002.
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 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 $0.7188
Kenneth F. Davis 10,000 $0.7188
Ronald L. Smorada 10,000 $0.7188
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 18, 2002, 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.
35
Percentage of Common
Shares Beneficially Stock Beneficially
Name of Beneficial Owner Owned Owned
- ------------------------ ----- -----
Gene R. McGrevin (1) 445,000 1%
Dan R. Lee (2) 278,152 *
Rosdon Hendrix (3) 147,000 *
Kenneth Davis (4) 120,243 *
John E. McKinley (5) 180,000 *
Ronald L. Smorada (6) 65,000 *
J. Michael Mabry (7) 243,908 *
Donald E. McLemore (8) 64,250 *
Roger G. Wilson (9) 85,549 *
Dimensional Fund Advisors, Inc. (10) 2,690,170 6%
All directors and executive officers as a group (9 persons) (11) 1,629,102 3%
- ------------------
* Represents less than 1% of the common stock
(1) Includes options to acquire 405,000 shares exercisable within 60 days.
(2) Includes options to acquire 228,087 shares exercisable within 60 days.
(3) Includes options to acquire 117,000 shares exercisable within 60 days.
(4) Includes options to acquire 87,000 shares exercisable within 60 days.
(5) Includes options to acquire 60,000 shares exercisable within 60 days.
(6) Includes options to acquire 65,000 shares exercisable within 60 days.
(7) Includes options to acquire 226,084 shares exercisable within 60 days.
(8) Includes options to acquire 51,250 shares exercisable within 60 days.
(9) Includes options to acquire 56,250 shares exercisable within 60 days.
(10) As reported by Dimensional Fund Advisors, Inc. in a Statement on Form
13G filed with the Securities and Exchange Commission. Dimensional Fund
Advisors, Inc. address is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California 90401.
(11) Includes options to acquire 1,295,671 shares exercisable within 60
days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 and J.
Michael Mabry (an executive officer of Isolyser) own 19.5% and 30%,
respectively, of Global Resources, and Mr. Mabry is the President and Chief
Executive Officer of Global Resources. Prior to December 31, 2001, Gene McGrevin
(the Chairman of Isolyser) owned 10% of Global Resources which he transferred to
Isolyser effective December 31, 2001. In accordance with a Services Agreement
dated June 1, 2000, 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 2001, Microtek began sourcing manufacturing of various of its
products
36
through Global Resources where such supply arrangements were advantageous to
Microtek based on favorable pricing and other considerations. During 2001, the
Company paid a total of $927,482 for products supplied, 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) (1) and (2) - Financial Statements and Schedules
The following financial statements and schedules are filed as part of this
annual report.
Consolidated Financial Statements and Independent Auditors' Report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999 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 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).
2.2 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).
2.3 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).
2.4 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).
37
2.5 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).
2.6 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).
2.7 Letter Agreement dated January ____, 2001, between Allegiance
Healthcare Corporation and the Company (incorporated by reference to
Exhibit 10.20 of the Company Annual Report on Form 10-K for the year
ended December 31, 2000).
2.8* Termination and Settlement Agreement dated September ___, 2001 between
Allegiance and Isolyser.
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).
4.4 Amended and Restated Credit Agreement dated as of May 14, 2001, between
the Company and The Chase Manhattan Bank, as Agent (incorporated by
reference to Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q
filed August 14, 2001).
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 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).
10.9 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).
10.10 1999 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Schedule 14A filed on April 19, 1999).
10.11 Employment Agreement dated as of December 17, 1998, between the Company
and Jerry Wilson (incorporated by reference to Exhibit 10.18 of the
Company's Annual Report on Form 10-K for the year ended December 31,
2000).
38
10.12 Employment Agreement dated as of July 1, 2000, between the Company and
Michael Mabry (incorporated by reference to Exhibit 10.19 of the
Company's Annual Report on Form 10-K for the year ended December 31,
2000).
10.13 Services Agreement dated January ____, 2000, between the Company and
MindHarbor, Inc (incorporated by reference to Exhibit 10.21 of the
Company's Annual Report on Form 10-K for the year ended December 31,
2000).
10.14 Services Agreement dated as of June 1, 2000, between the Company and
Global Resources, Inc (incorporated by reference to Exhibit 10.22 of
the Company's Annual Report on Form 10-K for the year ended December
31, 2000).
10.15* Stock Purchase Agreement dated December 31, 2001, among Gene McGrevin,
the Company, Global Resources, Inc. and others.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1
in the Company's Annual Report on Form 10-K for the year ended December
31, 2000).
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, 2001.
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. 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. 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).
11. 1999 Long-Term Incentive Plan (incorporated by reference to Exhibit A
to the Company's Schedule 14A filed on April 19, 1999).
12. Employment Agreement dated as of December 17, 1998, between the Company
and Jerry Wilson.
13. 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 29, 2002.
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 29, 2002.
SIGNATURE TITLE
- --------- -----
/s/ Dan R. Lee President, Chief Executive Officer and Director
- --------------------------- (principal executive officer)
Dan R. Lee
/s/ Roger G. Wilson Chief Financial Officer and Treasurer (principal
- --------------------------- financial and accounting officer)
Roger G. Wilson
/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, 2001 and 2000 and
for Each of the Three Years in the
Period Ended December 31, 2001
and Independent Auditors' Report
1
INDEPENDENT AUDITORS' REPORT
Board of Directors of Isolyser Company, Inc.:
Norcross, Georgia
We have audited the accompanying consolidated balance sheets of Isolyser
Company, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000,
and the related consolidated statements of operations and comprehensive income
(loss), changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14. These 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, 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.
Atlanta, Georgia Deloitte & Touche LLP
February 19, 2002
2
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS In thousands, except share data
DECEMBER 31, 2001 AND 2000
- -------------------------------------------------------------------------------
ASSETS 2001 2000
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 10,587 $ 14,379
Accounts receivable, net of allowance for doubtful
accounts of $894 and $1,122, respectively 16,141 11,836
Other receivables 587 433
Inventory, net 27,022 16,160
Prepaid expenses and other assets 1,215 1,633
--------- ---------
Total current assets 55,552 44,441
PROPERTY AND EQUIPMENT:
Land 245 245
Building and leasehold improvements 4,471 4,086
Equipment 15,169 13,332
Furniture and fixtures 1,849 1,804
Other 260 513
--------- ---------
21,994 19,980
Less accumulated depreciation 14,455 12,948
--------- ---------
Property and equipment, net 7,539 7,032
INTANGIBLE ASSETS:
Goodwill 29,953 26,691
Customer lists 586 386
Covenants not to compete 575 75
Patent and license agreements 3,847 3,869
Other 887 55
--------- ---------
35,848 31,076
Less accumulated amortization 9,497 8,019
--------- ---------
Intangible assets, net 26,351 23,057
Deferred income taxes 2,018 -
OTHER ASSETS, net 2,870 2,439
--------- ---------
TOTAL ASSETS $ 94,330 $ 76,969
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
--------- ---------
CURRENT LIABILITIES:
Accounts payable $ 4,934 $ 4,035
Accrued compensation 1,871 1,164
Other accrued liabilities 1,220 2,096
Current portion of long-term debt 260 256
Current portion of deferred licensing revenue 1,427 1,508
Current portion of accrued customer rebates 490 490
Current portion of product financing agreement 404 520
--------- ---------
Total current liabilities 10,606 10,069
LONG-TERM LIABILITIES:
Long-term debt 12,649 491
Long-term portion of deferred licensing revenue - 1,508
Long-term portion of accrued customer rebates - 490
Long-term portion of product financing agreement - 406
Other long-term liabilities 1,487 407
--------- ---------
Total long-term liabilities 14,136 3,302
SHAREHOLDERS' EQUITY:
Participating preferred stock, no par; 500,000
Shares authorized, none issued - -
Common stock, $.001 par; 100,000,000 shares
Authorized; 42,558,733 and 41,687,155 shares
Issued, respectively 43 42
Additional paid-in capital 210,251 208,613
Accumulated deficit (138,636) (143,425)
Unearned shares restricted to employee stock
Ownership plan (60) (120)
Unrealized loss on available for sale securities (96) -
Cumulative translation adjustment (239) (180)
--------- ---------
71,263 64,930
Treasury shares, at cost; 756,794 and
543,294 shares, respectively (1,675) (1,332)
--------- ---------
Total shareholders' equity 69,588 63,598
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 94,330 $ 76,969
========= =========
3
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- ----------------------------------------------------------------------------------------------------
In thousands, except per share data 2001 2000 1999
-------- -------- --------
NET SALES $ 79,470 $ 53,931 $ 97,554
LICENSING REVENUES 1,497 2,433 1,500
-------- -------- --------
Net revenues 80,967 56,364 99,054
COST OF GOODS SOLD 48,497 35,938 61,970
-------- -------- --------
Gross profit 32,470 20,426 37,084
OPERATING EXPENSES:
Selling, general, and administrative 25,166 21,246 26,596
Amortization of intangibles 1,520 1,780 1,440
Research and development 1,644 4,098 3,724
Impairment charge - - 769
Gain on dispositions - (21) (628)
Restructuring charge - 1,555 -
-------- -------- --------
Total operating expenses 28,330 28,658 31,901
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 4,140 (8,232) 5,183
INTEREST INCOME 321 823 450
INTEREST EXPENSE (810) (474) (1,645)
LOSS FROM MINORITY EQUITY POSITION - (4,104) -
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX PROVISION 3,651 (11,987) 3,988
INCOME TAX (BENEFIT) EXPENSE (1,138) 155 1,291
-------- -------- --------
NET INCOME (LOSS) $ 4,789 $(12,142) $ 2,697
-------- -------- --------
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized loss on available for sale securities (96) (13) -
Foreign currency translation (loss) gain (59) (158) 53
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 4,634 $(12,313) $ 2,750
======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - Basic and Diluted $ 0.11 $ (0.29) $ 0.07
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Basic 41,651 41,269 40,318
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Diluted 41,842 43,221 41,158
-------- -------- --------
See notes to consolidated financial statements.
4
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, 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)
Issuance of 119 shares of common stock pursuant to ESPP 119
Issuance of 284 shares of common stock pursuant to 401 (k) plan 284 1
Issuance of 250 shares of common stock for MICROBasix LLC 250
acquisition
Release of 17 shares reserved for ESOP
Stock option compensation expense
Tax benefits related to stock options
Purchase of 214 shares of treasury stock 214 (343)
Exercise of stock options and warrants 219
Unrealized loss on available for sale securities
Currency translation loss
Net income
--------------------------------------------------------
BALANCE - December 31, 2001 42,559 $ 43 757 $ (1,675)
========================================================
Additional
Paid in Accumulated Translation
Capital Deficit Adjustment
------- ------- ----------
BALANCE - December 31, 1998 $ 203,364 $ (133,980) $ (75)
Issuance of 110 shares of common stock pursuant to ESPP 117
Issuance of 251 shares of common stock pursuant to 401 (k) plan 582
Release of 17 shares reserved for ESOP (11)
Stock option compensation expense 568
Tax benefits related to stock options 217
Exercise of stock options and warrants 1,763
Currency translation gain 53
Net income 2,697
------------------------------------------
BALANCE - December 31, 1999 206,600 (131,283) (22)
Issuance of 38 shares of common stock pursuant to ESPP 111
Issuance of 119 shares of common stock pursuant to 401 (k) plan 366
Release of 17 shares reserved for ESOP (44)
Stock option compensation expense 73
Purchase of 496 shares of treasury stock
Exercise of stock options and warrants 1,507
Currency translation loss (158)
Net loss (12,142)
------------------------------------------
BALANCE - December 31, 2000 208,613 (143,425) (180)
Issuance of 119 shares of common stock pursuant to ESPP 119
Issuance of 284 shares of common stock pursuant to 401 (k) plan 333
Issuance of 250 shares of common stock for MICROBasix LLC 265
acquisition
Release of 17 shares reserved for ESOP (18)
Stock option compensation expense 106
Tax benefits related to stock options 467
Purchase of 214 shares of treasury stock
Exercise of stock options and warrants 366
Unrealized loss on available for sale securities
Currency translation loss (59)
Net income 4,789
------------------------------------------
BALANCE - December 31, 2001 $ 210,251 $ (138,636) $ (239)
==========================================
Unrealized
Loss on
Available
for
Sale ESOP Shareholders'
Securities Shares Equiity
---------- ------ -------
BALANCE - December 31, 1998 $ - $ (240) $ 68,675
Issuance of 110 shares of common stock pursuant to ESPP 117
Issuance of 251 shares of common stock pursuant to 401 (k) plan 582
Release of 17 shares reserved for ESOP 60 49
Stock option compensation expense 568
Tax benefits related to stock options 217
Exercise of stock options and warrants 1,764
Currency translation gain 53
Net income 2,697
------------------------------------------------
BALANCE - December 31, 1999 - (180) 74,722
Issuance of 38 shares of common stock pursuant to ESPP 111
Issuance of 119 shares of common stock pursuant to 401 (k) plan 366
Release of 17 shares reserved for ESOP 60 16
Stock option compensation expense 73
Purchase of 496 shares of treasury stock (898)
Exercise of stock options and warrants 1,508
Currency translation loss (158)
Net loss (12,142)
------------------------------------------------
BALANCE - December 31, 2000 - (120) 63,598
Issuance of 119 shares of common stock pursuant to ESPP 119
Issuance of 284 shares of common stock pursuant to 401 (k) plan 334
Issuance of 250 shares of common stock for MICROBasix LLC 265
acquisition
Release of 17 shares reserved for ESOP 60 42
Stock option compensation expense 106
Tax benefits related to stock options 467
Purchase of 214 shares of treasury stock (343)
Exercise of stock options and warrants 366
Unrealized loss on available for sale securities (96) (96)
Currency translation loss (59)
Net income 4,789
------------------------------------------------
BALANCE - December 31, 2001 $ (96) $ (60) $ 69,588
================================================
See notes to consolidated financial statements.
5
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- -----------------------------------------------------------------------------------------------------
In thousands 2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 4,789 $(12,142) $ 2,697
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 2,520 2,529 2,604
Amortization of intangibles 1,520 1,780 1,277
Licensing revenue (1,497) (2,433) (1,500)
Deferred income taxes (2,018) - -
Provision for doubtful accounts 165 507 143
Provision for (recovery of) obsolete and slow moving 256 3,522 (1,394)
inventory
Impairment loss - - 769
Gain on dispositions - (21) (628)
Compensation expense related to ESOP 42 16 49
Stock option compensation expense 106 73 568
Tax benefits related to stock options 467 - 217
Changes in assets and liabilities, net of effects of
acquisitions and disposed businesses:
Accounts receivable (895) (463) (1,916)
Inventories (7,036) 4,412 (1,145)
Prepaid expenses and other assets (322) 2,937 (1,827)
Accounts payable (1,488) (870) 1,474
Accrued compensation 707 (639) 109
Other accrued liabilities 1,080 2,451 (2,829)
Other liabilities (876) (3,370) (48)
-------- -------- --------
Net cash used in operating activities (2,480) (1,711) (1,380)
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of and deposits for property and equipment (1,055) (1,116) (1,306)
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) -
Acquisition of Deka Medical (11,640) - -
Acquisition of MICROBasix LLC (675) - -
Proceeds from sales of property and equipment - 168 -
Disposition proceeds - - 35,600
-------- -------- --------
Net cash (used in) provided by investing activities (13,370) 541 34,294
-------- -------- --------
FINANCING ACTIVITIES:
Borrowings under line of credit agreements 12,418 - 35,967
Repayments under line of credit agreements - - (59,086)
Proceeds from notes payable - 675 -
(continued)
6
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- -----------------------------------------------------------------------------------------------------
In thousands 2001 2000 1999
-------- -------- --------
Repayment of notes payable (778) (3,060) (2,630)
Proceeds from issuance of common stock 454 477 699
Repurchase of treasury stock (343) (898) -
Proceeds from exercise of stock options 366 1,507 1,764
-------- -------- --------
Net cash provided by (used in) financing activities 12,117 (1,299) (23,286)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (59) (158) 53
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,792) (2,627) 9,681
CASH AND CASH EQUIVALENTS:
Beginning of year 14,379 17,006 7,325
-------- -------- --------
End of year $ 10,587 $ 14,379 $ 17,006
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 602 $ 238 $ 1,345
======== ======== ========
Income taxes $ 483 $ 356 $ 928
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Disposition escrow account (Note 2) $ - $ - $ 3,130
======== ======== ========
Common stock issued for acquisition of MICROBasix
(Note 2) $ 265 $ - $ -
======== ======== ========
(concluded)
See notes to consolidated financial statements.
7
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001
- --------------------------------------------------------------------------------
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 markets its products to
hospitals and other end users through a broad distribution system
consisting of multiple channels including distributors, directly through
its own sales force, original equipment manufacturers, and private label
customers. The Company also markets certain of its products through
customer procedure tray companies. The Company's revenues are generated
through two operating units, Microtek Medical, Inc. ("Microtek"), a
subsidiary of the Company, and OREX Technologies International ("OTI"), an
operating division. Microtek is the core business of the Company. OTI is
seeking to commercialize its patented technology in the nuclear industry.
To date, revenues in the nuclear industry have not been material.
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 when persuasive evidence of a sale
arrangement exists, delivery has occurred, the price is fixed and
collectibility of the associated receivable is reasonably assured. The
Company does not grant its distributors or other customers price
protection rights or rights to return products bought, other than normal
and customary rights of return for defects in materials or workmanship.
The Company is not obligated to accept product returns for any other
reason. Actual returns have not historically 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
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
8
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, 2001, 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 15 to 40 years
Customer lists 5 to 15 years
Covenants not to compete 5 years
Patent and license agreements 13 to 17 years
Other intangibles 5 years
Portions of these intangibles were sold in conjunction with the 1999
dispositions (Note 2).
Investment in Available for Sale Securities - The Company holds
approximately 7.5% 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 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, 2001, 2000 and 1999.
Impairment of Long-Lived Assets - The Company reviews long-lived assets,
certain intangibles and goodwill for impairment when events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable based on estimates of future undiscounted cash flows.
Impairment of goodwill and the need for the related impairment writedown,
if any, is measured based on estimates of future undiscounted cash flows
including interest charges. In the event of impairment, the asset is
written down to its fair market value. In addition, management
periodically
9
reviews the appropriateness of the assets' amortization lives. Assets held
for disposal, if any, 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 earnings per share on the face of the income statement for all
entities with complex capital structures. Basic and diluted
weighted-average share differences result solely from dilutive common
stock options. Dilutive potential common shares are calculated in
accordance with the treasury stock method, which assumes that proceeds
from the exercise of all options are used to repurchase common shares at
market value. The number of shares remaining after the exercise proceeds
are exhausted represents the potentially dilutive effect of the options.
Options to purchase 3.3 million, 1.2 million and 2.9 million shares were
outstanding at December 31, 2001, 2000 and 1999, respectively, but were
not included in the computation of diluted net income (loss) per share
because the exercise price of the options was greater than the average
market price of the common shares, and therefore, the effect would be
antidilutive.
Derivative Instruments and Hedging Activities - The Company accounts for
derivative and hedging activities in accordance with SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, which was adopted by
the Company on January 1, 2001. Under SFAS 133, derivative instruments are
recognized in the balance sheet at fair value and changes in the fair
value of such instruments are recognized currently in earnings unless
specific hedge accounting criteria are met. At December 31, 2001 and 2000
the Company had no derivative instruments.
Newly Issued Accounting Standards - In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting and eliminates the use of the
pooling-of-interests method. The application of SFAS 141 did not affect
any of the Company's previously reported amounts included in goodwill or
other intangible assets. SFAS 142 requires that the amortization of
goodwill will cease prospectively upon adoption and instead, the carrying
value of goodwill will be evaluated using an impairment approach.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (however, see below). SFAS 142 is effective for
fiscal years beginning after December 15, 2001, and was implemented by the
Company on January 1, 2002. Subsequently, the Company expects to
discontinue amortizing goodwill but will continue to amortize other
intangible assets. At December 31, 2001, the net book value of goodwill
approximated $22.5 million and the net book value of other intangible
assets approximated $3.9 million. Goodwill amortization in 2001 was
approximately $1.1 million, or $.02 per share. The Company is currently
evaluating other impacts of the adoption of SFAS 142 on its consolidated
financial statements.
Additionally, in August 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Although SFAS 144 supersedes
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, it retains most of the concepts of
that standard, except that it eliminates the requirement to allocate
goodwill to long-lived assets for impairment testing purposes and it
requires that a long-lived asset to be abandoned or exchanged for a
similar asset be considered held and used until it is disposed (i.e., the
depreciable life should be revised until the asset is actually abandoned
or exchanged). Also, SFAS 144 includes the basic provisions of Accounting
Principles Board ("APB") Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for presentation of discontinued
10
operations in the income statement but broadens that presentation to
include a component of an entity rather than a segment of a business,
where that component can by clearly distinguished from the rest of the
entity. The provisions of SFAS 144 generally are to be applied
prospectively. SFAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company is
currently evaluating the impact of the adoption of SFAS 144 on its
consolidated financial statements.
Reclassifications - Certain reclassifications have been made in the 2000
and 1999 financial statements to conform to the 2001 presentation.
2. ACQUISTIONS AND DISPOSITIONS
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).
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 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).
On January 31, 2000, the Company transferred title of the remaining net
assets held-for-sale to Allegiance. The effect of not depreciating net
assets held for sale was $272,000 in 1999.
The following represents the results of operations (including impairment
charges) of the entities that were disposed of for the year ended December
31, 1999:
(in thousands, except per share data)
Net revenues $ 38,673
Net loss (509)
Net loss per share - Basic and Diluted (0.01)
On October 19, 2000, Microtek 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 annual
installments through October 2003 and bears interest at the Prime Rate, as
adjusted at the beginning of each calendar quarter (6.0% at December 31,
2001).
Effective February 2, 2001, Microtek entered into a definitive agreement
to acquire substantially all of the assets of Deka Medical, Inc. ("Deka")
for cash. Similar to Microtek, Deka previously manufactured and marketed
specialty equipment drapes for use 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.
Effective March 2, 2001, Microtek concluded the
11
acquisition by acquiring substantially all of the assets of Deka used in
Deka's patient and medical equipment drape product line. The purchase
price of approximately $11.6 million was allocated as follows (in
thousands):
Purchase price paid as:
Cash $ 3,000
Long-term debt
8,640
-------
Total purchase consideration 11,640
Allocated to:
Accounts receivable, net $ 4,109
Inventories, net
4,082
Property and equipment
1,773
Identifiable intangible assets
600
Accounts payable (2,185)
-------
Total allocation
8,379
-------
Goodwill $ 3,261
=======
Concurrent with the Deka acquisition, Microtek entered into deferred
compensation arrangements with certain of Deka's key employees to gain
their assistance with the integration of the Microtek and Deka
organizations immediately following the acquisition and their support
toward the continued success of the acquired product lines under
Microtek's management. These arrangements provide for lump-sum payments at
the end of a four-year employment period and are automatically forfeited
if employment is terminated during this period. The aggregate current
obligation under these arrangements at December 31, 2001 was $726,000 and
is included in other long-term liabilities in the accompanying
consolidated balance sheets. The corresponding deferred charge totaled
$522,000 at December 31, 2001 and is included in other assets in the
accompanying consolidated balance sheets. The deferred asset is being
amortized to compensation expense over the four-year term of the
arrangements. Total compensation expense recorded in 2001 with respect to
these arrangements was $204,000.
On February 16, 2001, the Company acquired the assets of MICROBasix LLC
("MICROBasix") for approximately $675,000 in cash and the issuance of
250,000 shares of the Company's common stock, having a market value of
approximately $265,000. 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.
The purchase price was allocated as follows (in thousands):
12
Purchase price paid as:
Cash $ 675
Common stock
265
------
Total purchase consideration
940
Allocated to:
Property and equipment $ 200
Identifiable intangible assets
740
------
Total allocation
940
------
Goodwill $ -
======
Each of the above described acquisitions in 2001 was accounted for under
the purchase method, and accordingly, the results of operations related to
the acquired assets have been included in the accompanying consolidated
financial statements from their respective dates of acquisition. The
following unaudited pro forma financial information for the years ended
December 31, 2001 and 2000, reflects the Company's results of operations
as if the Deka acquisition had been completed on January 1, 2000:
(in thousands, except per share data)
2001 2000
---- ----
Net revenues $ 84,717 $ 79,113
Net income (loss) 4,798 (15,217)
Net income loss per share - Basic and Diluted 0.12 (0.36)
Including the MICROBasix acquisition in the above pro forma financial
information would not have a material effect on the amounts presented. The
pro forma financial information is based on estimates and assumptions
which management believes are reasonable. However, the pro forma results
are not necessarily indicative of the operating results that would have
occurred had the Deka acquisition been consummated as of the date
indicated, nor are they necessarily indicative of future operating
results.
3. RESTRUCTURING AND IMPAIRMENT LOSS
In conjunction with the May 31, 1999 disposition of White Knight (Note 2),
the Company recorded an 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:
13
(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
In conjunction with the Company's 1998 disposition of certain of its OREX
manufacturing facilities at Arden, North Carolina and Abbeville, South
Carolina, the Company received a 19.5% ownership interest in Thantex
Specialties, Inc. ("Thantex"), a company formed to own and operate these
facilities following the disposition. 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.
The severance arrangements and closed office lease liabilities were
recorded in conjunction with a restructuring plan that included 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, New
York. Severance benefits for 99 employees totaling $636,000 were accrued
at December 31, 2000. Additional severance benefits for 54 employees
totaling $143,000 were accrued during 2001. The Company terminated five of
these employees in 2000. The remaining 148 were terminated in 2001.
Severance benefits totaling $779,000 were paid to these 153 employees
during 2001.
During 2001, the Company's reserve for obsolete inventory was reduced in
conjunction with the non-cash write-off of the inventory and related
reserve. The Company's closed office lease liability was reduced through a
$45,000 cash payment which settled the Company's outstanding lease
obligations and a non-cash reversal to selling, general and administrative
expenses of the $236,000 remaining obligation subsequent to the
settlement.
4. INVENTORIES
Inventories are summarized by major classification at December 31, 2001 and 2000
as follows:
(in thousands) 2001 2000
------- -------
Raw materials $13,504 $ 7,449
Work-in-process 890 984
Finished goods 14,634 8,909
------- -------
29,028 17,342
Less reserves for slow moving and obsolete inventories 2,006 1,182
------- -------
Inventory, net $27,022 $16,160
======= =======
At December 31, 2001 and 2000, net OREX inventory is approximately $2.6
million.
14
5. LONG-TERM DEBT
The Credit Agreement
The Company maintains a credit agreement between the Company and a Bank (the
"Credit Agreement"). As amended through December 31, 2001, the Credit Agreement
provides for a $17.5 million revolving credit facility, which matures on June
30, 2004. Borrowing availability under the revolving credit facility is based on
the lesser of (i) a percentage of eligible accounts receivable and inventory or
(ii) $17.5 million, less any outstanding letters of credit issued under the
Credit Agreement. Borrowing availability under the revolving facility at
December 31, 2001 was $1.9 million. Revolving credit borrowings bear interest,
at the Company's option, at either a floating rate approximating the Bank's
prime rate plus an interest margin (5.25% at December 31, 2001) or LIBOR plus an
interest margin (4.16% at December 31, 2001). There were no outstanding
borrowings under the revolving credit facility at December 31, 2000 and $12.4
million of borrowings at December 31, 2001. 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, 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,
2001, the Company was in compliance with all of its financial covenants under
the Credit Agreement.
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, 2001 and
2000. The Credit Agreement also provides for a fee of 0.375% per annum on the
unused commitment, an annual collateral monitoring fee of $35,000 and an
outstanding letter of credit fee of 2.0% per annum.
Other Long-Term Debt
The Company is obligated under certain long-term leases and notes payable, which
aggregated $491,000 and $747,000 at December 31, 2001 and 2000, respectively.
These obligations bear interest at rates ranging from 6.0% to 11.9% and mature
on various dates through October 2003. The acquisition notes payable aggregating
$450,000 and $675,000 million at December 31, 2001 and 2000, respectively, are
subordinated to the Credit Agreement.
The carrying value of long-term debt at December 31, 2001 and 2000 approximates
fair value based on interest rates that are believed to be available to the
Company for debt with similar prepayment provisions provided for in the existing
debt agreements.
6. LEASES
The Company leases office, manufacturing and warehouse space and equipment under
operating lease agreements expiring through 2007. Rent expense was $1.8 million,
$1.9 million and $2.1 million in 2001, 2000 and 1999, respectively. At December
31, 2001, minimum future rental payments under these leases are as follows:
(in thousands)
2002 $ 1,774
2003 1,067
2004 628
2005 390
2006 218
Thereafter 122
-------
Total minimum payments $ 4,199
=======
The Company may, at its option, extend certain of its office, manufacturing and
warehouse space lease terms through various dates.
15
7. INCOME TAXES
The income tax provision is summarized as follows:
(in thousands) 2001 2000 1999
---- ---- ----
Current:
Federal $ 130 $ (20) $ 466
State 269 50 454
Foreign 14 125 154
------- ------- -------
413 155 1,074
------- ------- -------
Deferred:
Federal (1,699) - -
State (319) - -
------- ------- -------
(2,018) - -
------- ------- -------
Tax expense resulting from allocating employee
stock option tax benefits to additional paid-in-capital 467 - 217
------- ------- -------
Total income tax (benefit) expense $(1,138) $ 155 $ 1,291
======= ======= =======
During 2001 and 1999, the Company recognized $467,000 and $217,000 in income tax
benefits associated with the exercise of employee stock options. The benefits
recognized related to compensation expense deductions generated during 1996.
These income tax benefits were recorded in the accompanying consolidated
financial statements as additional paid-in-capital.
The income tax (benefit) provision allocated to continuing operations using the
federal statutory tax rate differs from the actual income tax (benefit)
provision as follows:
----------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------
Federal statutory rate $ 1,241 34% $(4,075) (34)% $ 1,356 34%
State taxes, net of
Federal benefit 15 - (605) (5) 300 8
Items not deductible for
tax purposes, primarily
goodwill 145 4 136 1 3,045 76
Other, net 66 2 (25) - (124) (3)
Valuation allowance (2,605) (71) 4,724 39 (3,286) (83)
------- ------- ------- ------- ------- -------
Total $(1,138) (31)% $ 155 1% $ 1,291 32%
======= ======= ======= ======= ======= =======
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.
16
Deferred income taxes as of December 31, 2001 and 2000 are as follows:
December 31,
(in thousands) 2001 2000
---- ----
Deferred income tax assets (liabilities):
Allowance for doubtful accounts $ 99 $ 312
Inventory 1,991 2,118
Accrued expenses 29 (479)
Other (210) (90)
Valuation allowance (1,909) (1,861)
-------- --------
Net deferred income taxes - current - -
-------- --------
Operating loss carryforward 33,870 35,159
Capital loss carryforward 4,030 4,030
Intangible assets (515) (659)
Property and equipment 185 (439)
Tax credit carryforwards 471 244
Deferred license revenue 767 1,207
Investment write-off 1,642 1,640
State income taxes (108) -
Other 205 -
Valuation allowance (38,529) (41,182)
-------- --------
Net deferred income taxes - noncurrent 2,018 -
-------- --------
Total deferred income taxes $ 2,018 -
======== ========
Gross deferred income tax assets and (liabilities) equaled $43.3 million and
($800,000), respectively, at December 31, 2001, and $44.3 million and ($1.3
million), respectively, at December 31, 2000.
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. During 2001, the Company decreased its valuation
allowance by $2.6 million to $40.4 million. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible and the net
operating loss carryforwards can be utilized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Management has evaluated the
available evidence about future taxable income and other possible sources of
realization of deferred tax assets. The valuation allowance reduces deferred tax
assets to an amount that represents management's best estimate of the amount of
such deferred tax assets that more likely than not will be realized.
At December 31, 2000, the Company had federal and state net operating loss
carryforwards of $87.6 million and $89.4 million, respectively, of which $5.2
million related to compensation expense associated with the exercise of employee
stock options. At December 31, 2001, the Company had federal and state net
operating loss carryforwards of $86.7 million and $72.9 million, respectively,
of which $2.2 million relates to compensation expense associated with the
exercise of employee stock options. These operating loss carryforwards expire on
various dates beginning in 2011 through 2020.
At December 31, 2001, the Company has tax credit carryforwards of $471,000,
which expire in 2019 and 2020.
17
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.
9. PRODUCT FINANCING AGREEMENT
In conjunction with the August 11, 1998 disposition of its Arden manufacturing
facility, the Company entered into a product financing arrangement with Thantex
Holdings, Inc. ("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.
At the inception of this arrangement, the Company recorded a liability of $2.1
million, which represented the Company's total repurchase obligation to Thantex.
As the risks and rewards with respect to the inventory to be repurchased remain
with the Company, the Company continues to carry the inventory at historical
cost in the accompanying consolidated financial statements. The repurchase
obligation is being reduced as quantities are repurchased from Thantex. Through
December 31, 2001, the Company had paid approximately $1.7 million in
satisfaction of its repurchase obligation, reducing the Company's remaining
repurchase obligation to $404,000. The difference between the repurchase price
and the original sale price represents deferred interest expense, which is being
recognized on a straight line basis over a four-year period. Through December
31, 2001, interest expense of approximately $446,000 had been recorded, reducing
the remaining deferred interest to be recognized to approximately $149,000. The
Company's remaining repurchase obligation will be paid in full and the remaining
deferred interest expense will be recognized in 2002.
10. LICENSE AGREEMENT
In conjunction with the July 12, 1999 disposition of MedSurg (Note 2), the
Company entered into a 42-month license and supply 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 and the license
grant. 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 part of the agreement, Allegiance and the Company
agreed to develop a new generation of processing systems to compliment the
Enviroguard fabric life cycle cost performance. The processing systems were to
be produced and supported by the Company and Allegiance, and Allegiance agreed
to pay the Company a royalty if the products were disposed of via a publicly
owned water treatment facility. In 2001, the Company completed the assessment of
the market viability of its OREX healthcare technology and mutually agreed with
Allegiance to discontinue commercialization efforts in the healthcare
marketplace.
Deferred licensing revenues at December 31, 2001 were $1.4 million, which will
be amortized into revenues over the remaining 12 months of the agreement with
Allegiance at a rate of $119,000 per month. A summary of deferred licensing
revenue at December 31, 2001 is as follows:
18
(in thousands)
Original payment allocated to license revenue $ 10,500
Amortization in 1999 (1,500)
Amortization in 2000 (2,433)
Amortization in 2001 (1,497)
Settlement with Allegiance and write-off of receivables in 2000 and 2001 (3,643)
--------
Remaining deferred license revenue to be amortized in 2002 $ 1,427
========
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. At December 31, 2001, currently
exercisable options for 1.4 million shares were outstanding under the 1992 Plan.
Through December 31, 2001, no alternate rights had been issued. The expiration
of the 1992 Plan on April 27, 2002 does not affect options outstanding under the
1992 Plan.
The Company 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. All such options granted expired in 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,
2001, currently exercisable options for 12,000 shares were outstanding under
this plan.
In March 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan"),
which was approved by the shareholders on May 27, 1999. The 1999 Plan authorizes
the issuance of up to 1.2 million shares of common stock to certain employees,
consultants and directors of the Company under incentive and/or nonqualified
options, stock appreciation rights ("SARs") and other stock awards
(collectively, "Stock Awards"). Stock Awards under the 1999 Plan may be granted
at prices not less than 100% of the market value at the date of grant. Options
and/or SARs become exercisable based upon a vesting schedule determined by the
1999 Plan Committee and become fully exercisable upon a change in control, as
defined. Options expire not more than ten years from the date of grant and SARs
and other stock awards expire at the discretion of the 1999 Plan Committee. The
1999 Plan is unlimited in duration. At December 31, 2001, currently exercisable
options for 498,000 shares were outstanding under the 1999 Plan.
19
A summary of option activity during the three years ended December 31, 2001 is
as follows:
Weighted Average
Shares Exercise Price
------ --------------
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
Granted 1,280,000 1.44
Exercised (218,550) 1.67
Canceled (724,708) 3.92
---------
Outstanding - December 31, 2001 3,471,270 $ 2.23
=========
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 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.
The following table summarizes information pertaining to options outstanding and
exercisable at December 31, 2001:
20
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ------------------------ ------------------- ------------- -------------- ------------------ -------------
$ 0.72 - $ 1.25 623,220 5.9 $ 1.03 364,529 $ 1.16
$ 1.49 - $ 1.79 1,041,250 9.2 1.58 161,250 1.57
$ 2.13 - $ 2.73 811,081 5.1 2.21 521,790 2.21
$ 2.81 - $ 3.49 603,069 2.3 3.26 550,740 3.29
$ 3.69 - $ 4.13 167,650 5.1 3.76 126,150 3.79
$ 4.19 - $ 6.38 225,000 1.2 4.85 206,000 4.87
------------------- ------------- -------------- ------------------ -------------
3,471,270 5.7 $ 2.23 1,930,459 $ 2.65
=================== ============= ============== ================== =============
At December 31, 2001, 2000 and 1999, exercisable options were 1,930,459,
2,115,769 and 1,889,946, respectively, at weighted average exercise prices of
$2.65, $3.21 and $3.17, respectively.
The weighted average fair value of options granted in 2001, 2000 and 1999 was
$1.37, $1.78 and $1.35, respectively, using the Black Scholes option pricing
model with the following assumptions:
2001 2000 1999
---- ---- ----
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 114.9% 103.6% 40.3%
Risk free interest rate 5.0% 5.8% 5.4%
Forfeiture rate 1.4% 21.8% 3.8%
Expected life, in years 10.0 7.7 7.2
The volatility rate calculated in 1999 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 was 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. During 2001, the Company
granted rights to purchase 120,980 shares, which were issued in January 2002.
Pro forma compensation cost associated with the rights granted under the 1999
ESPP is estimated based on fair market value.
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
21
plans been determined based on the fair value at the grant dates consistent with
SFAS 123, the Company's pro forma net income (loss) and basic and diluted net
income (loss) per share for 2001, 2000 and 1999 would have been as follows:
(in thousands, except per share data) 2001 2000 1999
---- ---- ----
Net income (loss) $ 4,174 $ (12,528) $ 1,808
========= ========== =========
Net income (loss) per share - Basic and Diluted $ 0.10 $ (0.30) $ 0.04
========= ========== =========
At December 31, 2001 and 2000, shares available for future grants are 682,025
and 1,623,937 under the Company option plans and the 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 2001, 2000 and 1999, 16,500 reserved shares
have been released, resulting in compensation expense of $42,000, $16,500, and
$49,000, respectively. At December 31, 2001, 16,500 common shares with a market
value of $42,000 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 2001, 2000 and
1999.
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.
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,
22
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 Purchase Assistance Plan - During 2001, the Company adopted a stock
purchase assistance plan whereby the Company may extend financing to certain
officers and key employees for the purchase of up to an aggregate of $199,999 of
the Company's stock on the open market. These loans are secured by the shares
acquired and are repayable under full recourse promissory notes. The notes bear
interest at an annual rate of 7.0 percent and mature upon the earlier to occur
of (i) second anniversary of the note, (ii) sale of any of the Company's shares
by the borrower other than in connection with a cashless option exercise, or
(iii) termination of the borrower's employment. Amounts payable to the Company
under these note payable arrangements at December 31, 2001 totaled $147,000 and
are included in other assets in the accompanying consolidated balance sheets.
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. During 2001, this program was extended through December 2001 to
authorize the repurchase of an additional 1.0 million shares. As of December 31,
2001, the Company had repurchased 709,795 shares for an aggregate repurchase
price of $1.2 million. In December 2001, the Board of Directors authorized the
extension of this program through November 30, 2002.
12. SIGNIFICANT CUSTOMER AND GEOGRAPHIC CONCENTRATIONS
The Company generated 17%, 17% and 15% of its sales from a single customer in
2001, 2000 and 1999, respectively. The related accounts receivable from this
customer were $2.3 million, $3.1 million and $2.1 million at December 31, 2001,
2000 and 1999, respectively.
Included in the Company's consolidated balance sheet at December 31, 2001 are
the net assets of the Company's manufacturing and distribution facilities
located in the United Kingdom and the Dominican Republic which total $12.2
million. Only the facility in the United Kingdom sells products to external
customers. Sales from the United Kingdom were $3.5 million, $3.1 million and
$4.4 million in 2001, 2000 and 1999, respectively. Export sales by the Company
were $9.9 million, $5.7 million and $7.0 million in 2001, 2000 and 1999,
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 in the plan
agreement. The Company matches a portion of employee contributions to the plans
in 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 $333,000, $366,000 and $582,000 to the plan during
2001, 2000 and 1999, respectively.
23
14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
Year Ended Quarter
December 31, First Second Third Fourth
----------------- ------------------ ------------------ -------------------
2001
Net sales $ 16,256 $ 21,716 $ 21,869 $ 21,126
Gross profit 6,663 8,470 9,053 8,284
Net income 427 845 1,423 2,094
Income per common share -
Basic & Diluted $ 0.01 $ 0.02 $ 0.03 $ 0.05
2000
Net sales $ 14,015 $ 14,428 $ 14,168 $ 13,753
Gross profit 6,113 6,658 6,186 1,469 (1)
Net income (loss) 2 111 92 (12,347)(1)
Income (loss) per common share -
Basic & Diluted $ 0.00 $ 0.00 $ 0.00 $ (0.29)
1 Includes restructuring and impairment charges (Note 3)
24
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
=====================================================================================================================
Beginning of Charged to Deductions Balance at
Description Period Expense Other (1) (2) End of Period
Year ended December 31, 1999:
Allowance for doubtful trade accounts
receivable $ 1,039 $ 249 $ $ (459) $ 829
========= ========= ======== ========= =========
Reserve for obsolete and slow-moving
inventories $ 2,182 $ 134 $ $ (708) $ 1,608
========= ========= ======== ========= =========
Year ended December 31, 2000:
Allowance for doubtful trade accounts
receivable $ 829 $ 507 $ $ (214) $ 1,122
========= ========= ======== ========= =========
Reserve for obsolete and slow-moving
inventories $ 1,608 $ 3,522 $ $ (3,948) $ 1,182
========= ========= ======== ========= =========
Reserve for restructuring expenses $ $ 1,165 $ $ $ 1,165
========= ========= ======== ========= =========
Year ended December 31, 2001:
Allowance for doubtful trade accounts
receivable $ 1,122 $ 165 $ 430 $ (823) $ 894
========= ========= ======== ========= =========
Reserve for obsolete and slow-moving
inventories $ 1,182 $ 256 $ 1,015 $ (447) $ 2006
========= ========= ======== ========= =========
Reserve for restructuring expenses $ 1,165 $ 143 $ $ (1,282) $ 26
========= ========= ======== ========= =========
(1) Other amounts in 2001 represent the allowance for doubtful trade accounts
receivable and reserve for obsolete and slow-moving inventories acquired in
conjunction with the Deka acquisition.
(2) Deductions related to the allowance for doubtful trade accounts receivable
or the reserve for obsolete and slow-moving inventories represent amounts
written off during the period less recoveries of amounts previously written
off. In the case of the reserve for restructuring expenses, deductions
represent adjustments or payment of expenses charged to the reserves. (Note
3)
25