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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File Number: 0-24866
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ISOLYSER COMPANY, INC.
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(Exact Name of registrant as specified in its charter)
GEORGIA 58-1746149
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4320 INTERNATIONAL BOULEVARD
NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
(770) 806-9898
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.001 par value per share
stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by nonaffiliates of the
registrant based on the sale trade price of the common stock as reported on The
Nasdaq Stock Market on March 17, 2000, was approximately $220 million. For
purposes of this computation, all officers, directors and 5% beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors or 5% beneficial owners are,
in fact, affiliates of the registrant.
At March 17, 2000, there were outstanding 41,297,234 shares of the registrant's
common stock, $.001 par value per share.
Documents incorporated by reference: Certain exhibits provided in Part IV are
incorporated by reference from the Company's Registration Statements on Form S-1
(File Nos. 33-83474 and 33-97086), Registration Statement on Form S-4 (File No.
333-7977), Registration Statement on Form S-8 (File Nos. 33-85668), annual
reports on Form 10-K for the periods ended December 31, 1994, December 31, 1995,
December 31, 1996, December 31, 1997, and December 31, 1998, quarterly reports
on Form 10-Q for the period ended March 31, 1998, and September 30, 1999,
Schedule 14A filed on April 14, 1999, and current reports on Form 8-K dated May
31, 1995, September 18, 1995, June 4, 1996, August 30, 1996, December 19, 1996,
August 11, 1998, June 29, 1999 and July 12, 1999.
Note: The discussions in this Form 10-K contain forward-looking statements
that involve risks and uncertainties. The actual results of Isolyser Company,
Inc. and subsidiaries (the "Company") could differ significantly from those set
forth herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Business", particularly
"Business - Risk Factors", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as those discussed
elsewhere in this Form 10-K. Statements contained in this Form 10-K that are not
historical facts are forward-looking statements that are subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. A number
of important factors could cause the Company's actual results for 2000 and
beyond to differ materially from those expressed or implied in any forward-
looking statements made by, or on behalf of, the Company. These factors include,
without limitation, those listed in "Business - Risk Factors" in this Form 10-K.
PART I.
ITEM 1. BUSINESS
General
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Isolyser Company, Inc. ("Isolyser" or the "Company") believes that it is
the first company to offer high performance contamination control materials and
products coupled with engineered systems for the treatment and disposal of those
materials and products. Isolyser engineers these materials to achieve superior
product performance and savings in disposal costs through the environmentally
sensitive treatment of contaminated waste materials to minimize the amount of
waste and costs to dispose of regulated waste. The Company focuses upon markets
requiring high performance materials subject to regulatory requirements such as
hospital operating rooms, the nuclear industry, metal painting operations in the
automotive and aerospace industries, and clean room and pharmaceutical product
manufacturing. Isolyser takes a life cycle approach to engineering its materials
and treatment and disposal systems for those materials including material
performance requirements, waste management analysis, regulatory compliance and
life cycle cost management.
The Company's healthcare products provide patient care and safety benefits,
including protection from cross-infection, by providing Point-of-Generation(TM)
treatment of potentially infectious and hazardous waste. The Company believes
that its products benefit the environment by reducing the volume of solid waste
while significantly reducing the disposal costs of such waste. In this way,
Isolyser offers protection from potentially infectious and hazardous waste for
patients, staff, the public and the environment. Similar to the healthcare
industry, some industrial markets, such as metal painting operations in the
automotive and aerospace industries and the nuclear industry, operate heavily
regulated "controlled environments". Any product or service that is supplied to
these markets must satisfy detailed materials and product performance
specifications, as well as comply with regulations for the disposal of hazardous
waste. In these and many other demanding industrial markets, Isolyser's
technology of materials, products and engineered treatment and disposal systems
offers a unique combination of product features and end-user benefits including
life cycle cost management and ecological advantages.
The Company currently has two operating units: OREX Technologies
International ("OTI"), a division of Isolyser, and Microtek Medical, Inc.
("Microtek"), an Isolyser subsidiary. Isolyser has also formed a Corporate
Development Group to evaluate investment opportunities which might enhance
development and commercialization of Isolyser's technology.
Business Strategy
The Company's goal is to become a leading developer and provider of high
performance materials and integrated technology systems for the treatment and
disposal of those materials in markets subject to environmental or regulatory
control. The Company intends to improve its operating results through the
commercialization of its OREX(R) Degradable products, increased focus upon the
infection control business of Microtek, and continued new product development.
Commercializing OREX Degradables. The Company seeks to commercialize its
OREX Degradable products by improving the product to better satisfy customer
needs and provide added value within a range of markets. The Company seeks to
achieve these goals through offering materials with superior product performance
and contamination control characteristics, while reducing material costs on a
life cycle basis from materials purchasing through disposal, and accomplishing
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the foregoing in an ecologically beneficial way. To expand its resources, the
Company from time to time seeks to enter into strategic alliances with third
parties to more rapidly commercialize OREX Degradables. There can be no
assurance that OREX Degradables will achieve or maintain substantial acceptance
in their target markets. See "Risk Factors - History of Net Losses" and
"-Marketing Risks Affecting OREX Products".
Increased Focus on Infection Control Businesses. The Company seeks to
increase sales and earnings from its infection control business by enhancing
marketing and distribution efforts both domestically and internationally,
introducing new products, increasing direct sales representation, employing
tele-sales agents for added sales coverage, and capitalizing on low-cost
manufacturing opportunities in the Dominican Republic and Mexico.
Continuing New Product Development. The Company plans to continue to
improve, develop and introduce new and innovative products to the marketplace
designed to promote cost-effective achievement of occupational safety,
environmental protection and regulatory compliance objectives through continued
research and development. In addition, the Company will continue to substantiate
the safety and effectiveness of its products with testing and seek regulatory
approval for use of its products where applicable. See "Risk Factors - Marketing
Risks Affecting OREX Products" and "- Regulatory Risks".
Products and Markets
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A recent history of degradable products
Throughout the 1980's and early 1990's a plethora of companies launched
materials and products with environmentally sensitive features and benefits
throughout North America, Europe and Japan. These products typically made claims
concerning their biodegradability under appropriate conditions.
In most cases, these products were unsuccessful for some or all of the
following reasons. First, the materials and their end-use products were
significantly more expensive than their conventional competitors. Second, some
of these materials encountered manufacturing processing difficulties. Third,
products manufactured using these materials offered no end-use performance
advantages, and finally, the products lacked the biodegradable product
segregation and disposal infrastructure that would enable the end user to
dispose of them cost effectively, in an environmentally responsible manner.
These products offered few, if any, performance advantages, and were almost
invariably consigned to a conventional landfill, where they had no opportunity
to biodegrade. Few of these products are commercially available today.
Isolyser seeks to avoid these obstacles to successful degradable products
in several ways. First, Isolyser seeks wherever possible to offer materials and
end-use products at or close to cost parity with conventional competitors,
unless the value proposition of the material or product creates a significantly
greater value for the end user. Second, OREX Degradables materials have been
specifically engineered to process to degrade materials in a simple way. Third,
Orex Degradables technology has demonstrated significant potential to create
added value for the end user through improved product performance in use, when
compared with conventional competitive material. Fourth, Isolyser specifically
targets markets with waste streams that experience high disposal costs to apply
the OREX technology. Through use of this strategy, the Company seeks to achieve
for its customary significant life cycle cost savings in the handling, treatment
and disposal of infectious or contaminated waste. In these applications, the
unique hot water dissolution of the OREX technology permits the cost-effective
treatment of a wide range of contaminants. Fifth, Isolyser adopts an integrated
systems approach to the supply of its environmentally beneficial technology into
these market sectors. The Company provides products and services including:
materials, products, together with engineered treatment and disposal systems for
the handling and disposal of contaminated waste. Isolyser takes a life cycle
approach to engineering its materials and treatment and disposal systems for
those materials including material performance requirements, waste management
analysis, regulatory compliance and life cycle cost management. Finally, OREX
Degradables ultimately rely upon the wastewater system infrastructure and its
associated publicly owned treatment works for the biodegradation of OREX
products. This infrastructure enables the end-user to fulfill the promise of
materials and products with degradable properties.
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OREX Degradables and Enviroguard
OREX Degradables and Enviroguard(TM) are a combination of materials and
products that provide protection to people and the environment while providing
cost effective solutions to the problems associated with solid waste reduction
and disposal. OREX Degradables are manufactured from two generations of hot
water dispersible materials which can be configured into an array of materials
and products. The materials include woven and nonwoven fabrics; resin; film and
hard plastics and profile extruded materials. Woven fabrics converted into
healthcare products include operating room towels, absorbent gauze and
laparotomy sponges. Nonwoven fabrics converted into healthcare products include
surgical gowns, patient drapes, mop heads and surgical head wear. Film may be
converted into products including fluid collection bags, packaging materials and
equipment drapes. Resin may be extruded and thermoformed or injection molded
into items such as syringes, bowls, instruments and tubing. Combinations of
materials may be configured into composites such as operating room back table
covers. Products suitable for the hygiene industry including diapers and
underpads may also be manufactured using OREX Degradables materials. Products
for a wide range of other market sectors generically known as industrial markets
include wiping substrates; mops; protective apparel and other items of personal
protective equipment. OREX Degradables perform like traditional disposable and
reusable products; however, unlike traditional products, OREX Degradables can be
degraded or dissolved in hot water in a specially designed OREX Processor after
use for safe disposal through the municipal sewer system or other specialty
engineered treatment and disposal systems. Enviroguard is the Company's
trademark for a spunlaced OREX Degradables fabric that is softer, more flexible
and cooler than earlier generation OREX products. See "Risk Factors - History of
Net Losses", "- Marketing Risks Affecting OREX Products", "- Manufacturing and
Supply Risks" and "- Regulatory Risks".
The Company was initially focused on delivering OREX Degradables to the
healthcare industry. In connection with the Company's sale of its MedSurg
business to Allegiance, on July 12, 1999, Isolyser granted Allegiance an
exclusive worldwide license to manufacture, use and sell products made with
Isolyser's proprietary degradable materials for use in healthcare applications.
Under the terms of the license, Isolyser will be the sole supplier to Allegiance
of OREX degradable materials for use in the healthcare field provided Isolyser
satisfies its supply obligations. Allegiance is committed to purchase a certain
minimum quantity of Enviroguard fabric, subject to reduction if Isolyser fails
to obtain regulatory approvals for the dissolution of material in certain
scheduled markets within certain scheduled timeframes. If Allegiance fails to
satisfy its purchase commitment, the license becomes non-exclusive. Allegiance
has agreed to pay Isolyser a royalty equal to a percentage of the net sales
price of product sold by Allegiance to customers who use the product dissolution
technology. The license has an initial term expiring at the end of 2002. In the
event of the acquisition of more than 50% of the outstanding capital stock of
Isolyser or the sale of all or substantially all Isolyser's assets by a person
or entity not affiliated with Isolyser, the license extends for three years
following the date of such change in control and becomes non-exclusive.
Management also believes that the technology used to develop OREX
Degradables has the potential for broad commercial applications beyond the
healthcare industry where protection from potentially infectious or hazardous
waste and reduction of solid waste is important, such as the nuclear power
industry. Under an agreement dated June 14, 1999, the Company has granted RJ
Hanlon Company, Inc. a three year license providing for exclusive global
distribution rights to covers manufactured from OREX film for robots used in
automotive paint operations and non-exclusive rights for the distribution and
sale of OREX specialty wipes in the North American automobile industry. RJ
Hanlon has manufactured and sold custom designed covers for the automobile
industry for approximately twenty years. The OREX robot covers recently passed
independent laboratory tests for cleanliness and paint operation compatibility
for two North American automobile manufacturers. The Company has also negotiated
an agreement to pool resources with other strategic partners to market OREX
materials to the nuclear power industry. To date, no sales have been made by
Isolyser to the automotive painting or nuclear power industry. The Company
actively works to develop the use of OREX Degradables in these industries. See
"Risk Factors - Marketing Risks Affecting OREX Products".
Unlike traditional disposable products that must be disposed of through
either incineration or landfill, OREX Degradables may be disposed of at the
Point-of-Generation by dissolving or degrading the product through processing
the OREX material in hot water. Disposal in this manner reduces the need for
storage, handling and off-site transportation of waste, reduces the potential
for cross-infection, reduces the total volume of solid waste and facilitates
regulatory compliance. It is also designed to facilitate life-cycle cost
reduction and environmentally responsible disposal of waste. The processing of
OREX materials may involve special engineering requirements depending upon the
industry in which the processing technology is being used. For example, the
healthcare industry's processing of OREX largely involves the disposal of blood
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with or without infectious disease contamination. In this industry, the Company
uses an OREX processor similar to a commercial washing machine to process the
material for disposal through the municipal sewer system. An industry standard
method for disposal of blood, with or without infectious disease contamination,
is through the municipal sewer system. While the Company makes no claims or
representations in its product advertising or labeling that the disposal method
for OREX Degradables renders the disposal matter non-infectious, independent
test results indicate that dissolving OREX Degradables in hot water inactivates
in excess of 99% of tested microorganisms. Disposal in this manner is not
subject to federal regulation but may be regulated by state and local sewage
treatment plants to the extent that sewer discharges from hospitals or other
facilities may interfere with the proper functioning of such plants. Based on
product testing and available research, the Company believes that OREX
Degradables manufactured from PVA will not interfere with the proper functioning
of sewage treatment plants. Based on such testing and research, the Company has
obtained over 100 written and verbal non-binding concurrences and is in the
process of seeking additional non-binding concurrences with the Company's
conclusions from local authorities. While the Company is undertaking evaluation
of OREX Degradables manufactured from polymers other than PVA, no assurances can
be provided that such non-PVA based OREX will not interfere with the proper
functioning of sewage treatment plants. The processing of OREX materials in the
automotive paint and nuclear power industries involves separate engineering
requirements. In the automotive industry, paint and solvent contaminated waste
is classified as hazardous and incurs a high cost of disposal. OTI has developed
a processing and wastewater treatment system that renders OREX Degradables
materials non-hazardous accompanied by a reduction in hazardous waste disposal
costs. Based on industry tests conducted to date, this method of waste
management complies with automotive wastewater treatment and permitting
requirements. In the nuclear industry, OTI has teamed with a strategic alliance
partner to implement a disposal technology incorporating OTI dissolution
technology that accelerates the biodegradation of OREX Degradables combined with
a sophisticated separation technology to isolate the radioactive contaminants.
The combined technology results in an outfall of carbon dioxide and water while
providing a substantial reduction in radioactive waste volume. See "Government
Regulation" and "Risk Factors - Regulatory Risks".
Management has not been satisfied with the Company's performance to date in
manufacturing and selling OREX Degradables. In particular, the Company has
failed to achieve profitable margins on sales of OREX products. Accordingly, the
Company has sought to improve its operating results by, among other things,
reducing its marketing efforts directed towards the sale of OREX Degradables,
divesting itself of underperforming assets, reducing the amount of its debt, and
forming the OTI business unit to provide increased focus on OREX commercial
development. As a result of the Company's sale of its selling, marketing and
manufacturing facilities previously used for OREX products, OTI now engages in
the strategy of relying upon third parties for such selling, marketing and
manufacturing functions. See "- Marketing and Distribution", "- Manufacturing
and Supplies"; "Risk Factors - History of Net Losses", "- Marketing Risks
affecting OREX Products" and "-Manufacturing and Supply Risks".
Infection Control Products
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In 1998 the Company formed a business unit called the Infection Control
Group which consists primarily of the equipment drape, fluid control and safety
products manufactured by the Company's subsidiary, Microtek Medical, Inc.
("Microtek"). Consistent with its niche market strategy, Microtek is actively
engaged in the development of new products and the refinement of its existing
products to respond to the needs of its customers and the changing technology of
the medical products industry. Many of the Company's product innovations have
been generated from requests by the Company's customers and health care
professionals for products to be custom designed to address specified problems
in the operating room environment. The Company also monitors trends in the
health care industry and performs market research in order to evaluate new
product ideas. No assurance can be given that any new product will be
successfully developed or that any newly developed product will achieve or
sustain market acceptance.
Microtek designs, manufactures and markets two principal product lines for
use in niche markets of the healthcare industry. First, Microtek's infection
control products consist of more than 1,500 specially designed drapes for use in
draping operating room equipment during surgical procedures. This equipment
includes, for example, microscopes, ultrasound probes, endoscopic video cameras,
x-ray cassettes, imaging equipment, lasers and handles attached to surgical
lights. In addition to reducing the risk of cross-infection, these products
increase operating room efficiency by reducing the need to sterilize equipment
between procedures. These disposable sterile products are generally made from
plastic film containing features designed for the operating room environment,
such as low glare and anti-static features. During 1999 the Company completed
its development of a complete line of plastic (film) patient drapes that include
a full line of adhesive incise drapes including a subset of adhesive drapes that
have an anti-microbial agent incorporated into the film. The anti-microbial
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incise drapes are patented and are a joint development of the Company and
Microban Products Company and are marketed under the trade names of Microtek
Medical and Microban(R). Microtek's second principal product line, fluid-control
products, are specially designed disposable pouches which are attached to a
surgical patient drape (called a substrate), which is placed around the
operative site. For instance, Microtek manufactures a specialty pouch for knee
arthroscopy. This pouch captures not only the bodily fluids that are discharged
from the knee but also the sterile saline that is infused into the operative
site during the arthroscopic procedure. Microtek's fluid control product line
primarily consists of more than 200 different plastic disposable collection
pouches.
For 1997, 1998 and 1999, sales of Microtek products accounted for
approximately 27%, 33% and 59% of the Company's total revenues, respectively.
Included in such sales figures are $8.5 million, $8.6 million and $6.8 million
of export sales by Microtek during 1997, 1998 and 1999, respectively. The
reduction in export sales for 1999 is primarily due to the reclassification of
former export sales as domestic sales due to a change in shipping destination.
The Company offers several other lines of products for the management of
potentially infectious and hazardous waste. The leading lines of these safety
products are described below.
Liquid Treatment System (LTS) is a super-absorbent powder which converts
potentially infectious liquid waste into a solid waste suitable for landfill
disposal, subject to applicable regulatory requirements. LTS is typically added
to a suction canister or other fluid collection device in which blood or other
body and irrigation fluids are collected during surgery or in wound drainage
after surgery. LTS converts liquid waste into a solid waste, thereby
facilitating handling, transportation and disposal. Regardless of whether LTS is
disposed of in landfills or through incineration or other special process, LTS
provides advantageous occupational safety benefits by Point-of-Generation
treatment of potentially infectious liquid waste. See "- Government Regulation".
Sharps Management System (SMS) is designed to encapsulate and physically
disinfect contaminated sharps (such as needles, syringes, scalpels, etc.) at the
Point-of-Generation. The product consists of a puncture- and spill-resistant
plastic container partially filled with a bathing solution for encapsulation.
When full, a small amount of catalyst powder is added. The catalyst creates a
chemical reaction which heats the container and solidifies the contents, thus
encapsulating the sharps and reducing the risk of accidental punctures. The
container of SMS treated sharps is suitable for handling, transportation and
disposal.
The Company also manufactures and markets various other products. In April,
1996, Microtek purchased the Venodyne division of Advanced Instruments, Inc.
which manufactures and markets pneumatic pumps and disposable compression
sleeves for use in reducing deep vein thrombosis. Sales of these products have
not been material to the Company's results of operations.
The Company acquired Microtek in a pooling of interests transaction as of
September 1, 1996, and the Company's financial statements prior to the
acquisition date have accordingly been restated to include Microtek's financial
statements. Microtek is a Delaware corporation which, prior to the Microtek
acquisition, operated independently following its spin-off from Teknamed
Corporation, a medical products company, in 1984.
Procedure Trays
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In July 1999, the Company sold to Allegiance its procedure tray business
formerly operated through the Company's MedSurg subsidiary. Procedure trays are
sterilized packs which include all components (traditionally conventional
disposable or reusable medical products such as laparotomy sponges, drapes and
suction tubing) used in medical (primarily surgical) procedures. For 1997, 1998
and 1999, sales of procedure trays and related products accounted for
approximately 37%, 40% and 28% of the Company's total revenue, respectively. As
a result of the sale of MedSurg, the Company no longer sells procedure trays.
White Knight
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Effective May 31, 1999 the Company sold its White Knight subsidiary.
Through White Knight, the Company formerly manufactured and marketed non-woven
infection control products and protective apparel for use primarily in the
healthcare industry.
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Net sales by the Company through White Knight in 1997, 1998 and 1999
represented 30%, 25% and 13%, respectively, of the Company's total revenue.
Included in such sales figures are $3.3 million, $2.5 million and $17,000 of
export sales by White Knight during 1997, 1998 and 1999, respectively.
Marketing and Distribution
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Substantially all of the Company's sales in 1999 were made to the
healthcare market.
As a part of a restructuring plan begun in 1997 and completed in 1999, the
Company substantially reduced its sales force. As of December 31, 1999, the
Company's marketing and sales force consisted of 44 sales representatives, seven
field sales managers, four home office sales managers, seven marketing managers
and 16 persons in customer support.
The Company is dependent upon a few large distributors for the distribution
of its products. The Company's top three customers accounted for approximately
22% of the Company's total revenues during 1999. Of these customers, only
Allegiance accounted for over 10% of the Company's total sales during 1999. Due
to the exclusive worldwide nature of the license granted by Isolyser to
Allegiance, the Company will depend exclusively upon Allegiance during the term
of that license for sales of OREX and Enviroguard products to healthcare
markets. Because distribution of medical products is heavily dependent upon
large distributors, the Company anticipates that it will remain dependent upon
these customers and others for the distribution of its products. If the efforts
of the Company's distributors prove unsuccessful, or if such distributors
abandon or limit their distribution of the Company's products, the Company's
sales may be materially adversely affected. See "Risk Factors - Reliance Upon
Distributors".
The Company sells its equipment drapes and fluid control products through
distributors and custom procedure tray companies. The Company also markets
certain of its products to other manufacturers on a "non-branded" or private
label basis. For example, the Company's fluid control pouches are sold to
manufacturers of substrates, and the Company's equipment drapes are sold to
manufacturers of the equipment for which such drapes were designed.
The Company's total export sales during 1997, 1998 and 1999 were $11.8
million, $11.1 million and $7.0 million, respectively. Outside the United
States, the Company markets its products principally through a network of
approximately 175 different dealers and distributors. As of December 31, 1999,
the Company also had two sales representatives operating in international
markets, and maintains an office and warehouse distribution center near
Manchester, England and an office for one of its sales representatives and
support personnel in Luxembourg, Europe.
Isolyser sells its LTS product line under a non-exclusive distribution
agreement with Allegiance, a leader in the sale of suction canisters and related
apparatus. The agreement expires February 28, 2001 and is subject to renewal for
one-year terms thereafter unless otherwise terminated. The Company also
distributes LTS through other national distributors.
To further expand its marketing resources, the Company from time to time
seeks to enter into strategic alliances with third parties such as specialty
equipment manufacturers and other non-competitive companies which would enable
it to sell various of its products. While the Company from time to time engages
in such discussions, the Company provides no assurances that any such strategic
alliances will be consummated or, if consummated, that any such alliance will be
favorable to the Company.
Manufacturing and Supplies
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OREX is manufactured from a family of organic, degradable polymers that
dissolve or disperse in hot water and degrade in the wastewater system or in
custom designed OREX processing equipment. Woven and nonwoven products are
manufactured using PVA-based polymer chemistry. PVA is a safe material used
widely in a variety of consumer products such as eye drops, cosmetics and cold
capsules. The Company has more recently begun to develop and commercialize the
use of a second generation polymer system known generically as its Novel
Degradable Polymer or NDP-system. This system is currently being developed for
the manufacture of OREX Degradables film, composites of film with nonwoven
fabric, and extruded, thermoformed or injection molded solid plastic items. This
NDP family of polymers dissolves or disperses and then degrades in a processing
step which is initiated by the action of hot water at an elevated pH. The
Company currently obtains its PVA raw materials from various foreign suppliers.
Risks exist in obtaining the quality and quantity of PVA at a price that will
allow the Company to be competitive with manufacturers of conventional
disposable and reusable products. Prevailing prices of PVA have adversely
7
affected the Company's manufacturing costs for its OREX products. PVA resin from
Japan, Taiwan and certain producers in China are subject to anti-dumping duties
if imported into the United States. See "Risk Factors - Manufacturing and Supply
Risks".
Until 1997, the Company had followed a strategy of capital equipment
purchases and acquisitions to expand and vertically integrate the Company's
manufacturing capabilities, thereby enabling the Company to manufacture and
convert into finished goods many OREX Degradables internally. The Company
acquired OREX Degradables material manufacturing plants as a part of this
expansion strategy. In 1998, the Company sold its OREX materials manufacturing
plants. These plants were used by the Company to convert PVA fiber into OREX
nonwoven roll goods and towels. In connection with the sale, the Company sold
4.5 million pounds of excess PVA fiber at a price of $.45 per pound under an
agreement pursuant to which the Company agreed to repurchase 2.6 million pounds
of such fiber (either as fiber or converted goods) over a four year period at a
cost of $.80 per pound of fiber. Through 1999, the Company has paid $636,000 for
such fiber. See "Risk Factors - Manufacturing and Supply Risks".
The Company has developed and begun sourcing OREX materials and Enviroguard
fabric using the hydroentangled method of nonwoven roll-good material
manufacturing. This process is neither chemically nor thermally bonded. Through
these roll-good material development and manufacturing efforts, both domestic
and internationally, the Company seeks to reduce the cost of producing OREX
drapes and gowns while simultaneously improving the quality of these products.
The Company currently sources all of these roll goods from outside the United
States. The Company has initially relied on manufacturers in China for its
Enviroguard nonwoven materials and is seeking to reduce its reliance on such
manufacturers by sourcing such materials from manufacturers in other locations.
For example, the Company has recently begun to have a manufacturer located in
Israel supply Enviroguard nonwoven materials.
The Company now relies exclusively on domestic and foreign independent
manufacturers to supply OREX Degradables products to the Company's customers.
The Company uses contractors in the People's Republic of China to manufacture
OREX Degradables sponge products and spunlaced OREX Degradables fabric. The
Company has used various independent parties (both domestically and
internationally) to manufacture various OREX Degradables thermoformed, extruded
and composite products which have not yet been offered for commercial sale by
the Company. The Company's requirements (which to date have been modest) for
OREX Degradables film products are currently being supplied by a contract
manufacturer. The Company has not yet successfully reduced the cost of
manufacturing OREX thermoformed and extruded products and OREX film products to
a sufficient degree to offer such products commercially, although the Company
seeks to use its NDP technology to reduce the cost of manufacturing OREX film
products. See "Risk Factors - Manufacturing and Supply Risks".
The Company manufactures its equipment drapes and fluid control products at
its facilities in Columbus, Mississippi, the Dominican Republic and Empalme,
Mexico. The Company utilizes a facility in Jacksonville, Florida as a
distribution point for receipt and shipment of product and for light
manufacturing. The Company also maintains a distribution facility near
Manchester, England.
The Company currently relies upon independent manufacturers for the
purchase of materials and components for most of its safety products. The
Company uses, and expects to continue to use, vendors of stock items to the
extent possible to control direct material costs for its safety products. The
Company's safety products production facilities located in Columbus, Mississippi
are used for mixing liquid and powdered chemicals, other light manufacturing and
packaging.
Order Backlog
- -------------
At December 31, 1999, the Company's order backlog totaled approximately
$356,000 compared to approximately $2.0 million (in each case net of any
cancellations) at December 31, 1998. All backlog orders at December 31, 1999 are
expected to be filled prior to year end 2000. Backlogs at December 31, 1998
included the Company's procedures tray and White Knight businesses sold during
1999. Microtek typically sells its products pursuant to written purchase orders
which generally may be canceled without penalty prior to shipment of the
product. Accordingly, the Company does not believe that the level of backlog
orders at any date is material or indicative of future results.
8
Technology and Intellectual Property
- ------------------------------------
The Company seeks to protect its technology by, among other means,
obtaining patents and filing patent applications for technology and products
that it considers important to its business. The Company also relies upon trade
secrets, technical know-how and innovation and market penetration to develop and
maintain its competitive position.
The Company holds several patents issued by the U.S. Patent and Trademark
Office concerning methods of disposing of OREX Degradables, including: (1) US
Patent 5,207,837, issued in 1993 and successfully reexamined (B1 6,207,834) by
the U.S. Patent Office in 1996, which covers a method of disposing OREX
Degradables that are configured into a drape, towel, cover, overwrap, gown, head
cover, face mask, shoe covering, sponge, dressing, tape, underpad, diaper, wash
cloth, sheet, pillow cover, or napkin; (2) US Patent 5,181,967, issued in 1993
and successfully reissued (RE 36399) in 1999, and which covers a method of
disposing particular OREX Degradables utensils such as procedure trays,
laboratory ware, and patient care items; (3) US Patent 5,181,966, issued in 1993
and successfully reexamined (B1 5,181,966) in 1996, and which covers a method of
disposing OREX Degradables configured into packaging materials; and (4) a United
States patent application which the Patent Office informed Isolyser in November,
1999 of its intent to issue a patent which patent would cover a method of
disposing PVA garments, linens, drapes and towel.
Isolyser also has several patents which cover particular OREX Degradable
products, including (1) US Patent 5,650,219, which was issued in 1995 and covers
a method of disposing particular OREX Degradables configured into garments,
linens, drapes, and towels; (2) US Patent 5,620,786, issued in 1997 and covers
particular OREX Degradables that are configured into towels, sponges, or gauze;
(3) US Patent 5,268,222, issued in 1993 and covers a composite fabric made with
an OREX Degradable; (4) US Patent 5,885,907, issued in March, 1999, and covers
particular OREX Degradables configured into a towel, sponge, or gauze; (5) US
Patents 5,470,653 and 5,707,731, issued in 1995 and 1998, and which cover mop
heads made from OREX Degradables; and (6) US Patent 5,985,443, issued November,
1999, and which covers the methods of disposing a mop head.
Isolyser also has patents that cover methods of producing OREX Degradables,
including: (1) US Patent 5,871,679, issued in February, 1999, and which covers
methods for producing OREX Degradables that are configured into thermoplastic
films and fabrics; (2) US Patent 5,661,217, issued in 1997, which covers a
method of forming molded packaging and utensils from OREX Degradables, and
methods of forming OREX Degradables films into a packaging, drape, cover,
overwrap, gown, head cover, face mask, shoe cover, CSR wrap, tape, underpad or
diaper; (3) US Patent 5,972,039, issued October, 1999, and which covers methods
for enhancing the absorbency and hand feel of OREX Degradables fabrics; and (4)
US Patent 5,871,679 for producing OREX Degradables that are configured into film
and fabric.
The Company also has several issued patents related to its SMS and LTS
technologies.
The Company currently has several applications pending before the U.S.
Patent and Trademark Office which relate to OREX Degradables. Specifically,
those applications concern (i) a new class of OREX biodegradable polymers, (ii)
methods for enhancing the absorbency and hand feel of OREX Degradables fabrics,
(iii) finishing formulations for OREX Degradables, (iv) a pipeliner manufactured
with OREX Degradables, (v) medical containers made from OREX Degradables, (vi) a
method of absorbing oil with OREX Degradables fabric, (vii) PVA fabric that is
made from the spunlace process, including PVA spunlaced fabrics that are
configured into surgical gowns, drapes, and industrial wipes, (viii) wipes made
from any PVA substrate, (ix) equipment covers made from OREX degradables, (x)
methods of treating industrial and medical waste, and (xi) PVA fabrics that are
coated on both sides for greater repellency. The Company is not aware of any
facts at this time that would indicate that patents sought by these applications
will not be issued; however, no assurances can be provided that patents will
issue from these applications. See "Risk Factors Protection of Technologies."
The Company's U.S. patents expire between 2007 and 2020. The Company files
for foreign counterpart patents on those patents and patent applications which
the Company considers to be material to its business. No assurance can be given
that the various components of the Company's technology protection arrangements
utilized by the Company to protect its technologies, including its patents, will
be successful in preventing others from making products competitive with those
offered by the Company, including OREX Degradables. See "Risk Factors -
Protection of Technologies".
9
Under a five-year license agreement from Microban Products Company entered
into on March 22, 1996, Microtek acquired the exclusive right to incorporate
certain antimicrobial additives in the Company's surgical and equipment drapes
manufactured with film and nonexclusive rights to such additives in non-woven
drape products, subject to the payment of royalties and certain other terms and
conditions specified in the license agreement. Microtek holds a US patent
covering a surgical drape having incorporated therein a broad spectrum
antimicrobial agent which expires in 2010. To date, such license and patent have
not been material to the Company's operations.
The Company has registered as trademarks with the U.S. Patent and Trademark
Office "Isolyser," "OREX", "LTS" and "SMS". In addition, the Company is applying
to register the trademark "Enviroguard" in the U.S. Patent and Trademark Office.
Trademark registrations for "Isolyser", "OREX" and "LTS" have also been granted
in various foreign countries. Microtek maintains registrations of various
trademarks which the Company believes are recognized within their principal
markets.
Competition
The markets in which the Company competes are characterized by competition
on the basis of quality, price, product design and function, environmental
impact, distribution arrangements, service, customer relationship, and
convenience. Many of the Company's competitors have significantly greater
resources than the Company. See "Risk Factors - Competition".
Although the Company is not aware of any products currently available in
the market place which provide the same disposal and degradable benefits as OREX
Degradables and Enviroguard, these products compete with traditional disposable
and reusable products currently marketed and sold by many companies. Single use
disposable (as opposed to reusable) drapes and gowns have been available for
over 25 years and according to a 1992 market study account for over 80% of the
surgical market. Competing manufacturers of traditional disposable medical
products are large companies with significantly greater resources than those of
the Company. These competitors have in many instances followed strategies of
aggressively marketing products competitive with OREX Degradables to buying
groups resulting in increasing cost pressures. These factors have adversely
affected the Company's ability to adjust its prices for its OREX products to
take into account disposal cost savings provided by these products, and have
adversely affected the Company's ability to successfully penetrate potential
customer accounts. See "Risk Factors - Marketing Risks affecting OREX Products"
and "Competition".
The market for the Company's equipment drapes and fluid control products is
also highly competitive, and is dominated by a few large companies such as
Allegiance, Kimberly-Clark Corporation, Johnson & Johnson and 3M Corporation.
Competition for the Company's safety products includes conventional methods
of handling and disposing of medical waste. Contract waste handlers are
competitors which charge premium rates to remove potentially infectious and
hazardous waste and transport it to an incineration or autoclaving site. Many
hospitals utilize their own incinerators to dispose of this waste. In addition,
systems are available that hospitals can purchase for grinding and chemically
disinfecting medical waste at a central location.
The Company believes that its LTS products command a dominant share of a
market that thus far has been marginally penetrated. However, the Company is
aware of a variety of absorber products that are directly competitive with LTS.
Recent regulatory developments have placed LTS at a competitive disadvantage to
a competitor's absorber product. See "- Government Regulation". The Company
estimates that it has only a small (less than 5%) market share for its SMS
products. The market niche for disposal of sharps is dominated by a number of
other companies.
Government Regulation
- ---------------------
The Company is subject to a number of federal, state and local regulatory
requirements which govern the marketing of the Company's products and the use,
treatment and disposal of these products utilized in the patient care process.
In addition, various foreign countries in which the Company's products are
currently being distributed or may be distributed in the future impose
regulatory requirements. See "Risk Factors - Regulatory Risks".
The Company's traditional medical products (including, for example,
equipment drapes), OREX Degradables line of products and SMS products are
regulated by the FDA under medical device provisions of the Federal Food, Drug
and Cosmetic Act (the "FDCA"). FDA regulations classify medical devices into one
10
of three classes, each involving an increasing degree of regulatory control from
Class I through Class III products. Medical devices in these categories are
subject to regulations which require, among other things, pre-market
notifications or approvals, and adherence to good manufacturing practices,
labeling, record-keeping and registration requirements. Patient care devices
which the Company currently markets are classified as Class I or Class II
devices subject to existing 510(k) clearances which the Company believes satisfy
FDA pre-market notification requirements. The FDA has issued to the Company
510(k) clearances on OREX Degradables products for surgical sponges, operating
room towels, drapes, gowns, surgeon's caps, surgeon's vests, shoe covers and
medical bedding. The Company is currently developing, evaluating and testing
certain OREX Degradables film and thermoformed or extruded OREX products
manufactured from non-PVA polymers, and it is possible that new 510(k)
clearances will be required for such products. There can be no assurances as to
when, or if, other such 510(k) clearances necessary for the Company to market
products developed by it in the future will be issued by the FDA. The FDA
inspects medical device manufacturers and distributors, and has broad authority
to order recalls of medical devices, issue stop sale orders, seize non-complying
medical devices, enjoin violations, impose civil and criminal penalties and
criminally prosecute violators.
The FDA also requires healthcare companies to satisfy record-keeping
requirements and the quality system regulation (QSR) which require that
manufacturers have a quality system for the design and production of medical
devices intended for commercial distribution in the United States. Failure to
comply with applicable regulatory requirements, which may be ambiguous or
unclear, can result in fines, civil and criminal penalties, stop sale orders,
loss or denial of approvals and recalls or seizures of products.
Countries in the European Union require that products being sold within
their jurisdictions obtain a CE mark and be manufactured in compliance with
certain requirements. The Company has CE mark approval to sell of its safety and
medical device products in Europe. One of the conditions to obtaining CE mark
status involves the qualification of the Company's manufacturing plants and
corporate offices under certain certification processes. All of the Company's
manufacturing plants and corporate offices have obtained such certifications. To
maintain CE mark approval, the Company has to satisfy continuing obligations
including annual inspections by European notified bodies as well as satisfy
record keeping and other quality assurance requirements. The notified bodies
have the authority to stop the Company's use of the CE mark if the Company fails
to meet these standards. While the Company believes that its operations at these
facilities are in compliance with requirements to maintain CE mark status, no
assurances are provided that such certifications will be maintained or that
other foreign regulatory requirements will not adversely affect the Company's
marketing efforts in foreign jurisdictions.
Under the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"),
any product which claims to kill microorganisms through chemical action must be
registered with the EPA. Any product that makes a claim that it kills
microorganisms exclusively via a physical or mechanical means is regulated as a
physical "device" under FIFRA. Pesticide devices do not require EPA
registration, but are subject to some requirements, including labeling and
record keeping. FIFRA affects primarily the Company's LTS and SMS products. The
Company believes its SMS product qualifies as a physical disinfecting device
under FIFRA, which permits the Company to advertise that such product physically
disinfects microorganisms without EPA registration. LTS is not registered with
the EPA. The Company has marketed LTS in a manner in which the Company believed
complied with FIFRA by not making claims in product labeling or marketing that
LTS treats or disinfects medical waste or kills microorganisms. In 1998 the EPA
announced its position that FIFRA requires that products, such as LTS, which
hold state approvals related to anti-microbial efficacy, such as state approval
for landfill of LTS-treated waste, impliedly make claims about killing
microorganisms which necessitate registration under FIFRA. The Company continues
to sell its LTS products without FIFRA registration, and has met with the EPA
concerning its continuing sale of LTS products and methods to obtain expedited
registration of a new version of LTS under FIFRA. The Company has altered its
marketing of LTS to comply with EPA's new guidance. The Company recently
obtained conditional registration under FIFRA of such new version of LTS. The
Company must still seek numerous state and local registrations of such new LTS
products to allow such product to be landfilled in such places. No assurances
can be provided that the Company will obtain such registration or that prior or
continuing sales of the Company's LTS products may not either be stopped or
subject the Company to penalties or other regulatory action. A product line
marketed by a competitor of the Company's LTS products has been registered under
FIFRA, placing LTS at a competitive disadvantage to such competing product line.
See "Risk Factors - Regulatory Risks" and "- Reliance Upon Distributors".
State and local regulations of the Company's products and services is
highly variable. In certain cases, for example, state or local authorizations
are required to landfill Isolyser's SMS or LTS products, or both. In November,
1997, as a result of a review of an existing approval in California for the
landfilling in California of waste treated by LTS, California authorities
11
revoked such approval. While LTS offers benefits unrelated to landfilling, such
action has adversely affected the Company's ability to sell LTS. The Company is
in the process of obtaining from the state of California approval to landfill
waste treated by a new version of LTS. Certain other states are also reviewing
previously issued approvals to landfill LTS-treated waste within such other
states, but no action has yet been taken as a result of such review processes.
No assurances can be provided that prior regulatory actions or pending
regulatory reviews will not continue to have an adverse effect upon the sales of
the Company's liquid absorbent products. [Status] See "Risk Factors - Reliance
Upon Distributors" and "- Regulatory Risks".
State and local sewage treatment plants regulate the sewer discharge, such
as dissolved OREX Degradables, from commercial facilities to the extent that
such discharges may interfere with the proper functioning of sewage treatment
plants. Based on product testing and available research the Company believes
that OREX Degradables manufactured from PVA will not interfere with the proper
functioning of sewage treatment plants. The Company has obtained from state and
local authorities over 100 written and verbal non-binding concurrences with the
Company's conclusions and continues to pursue additional non-binding
concurrences. While the process of obtaining such concurrences is time consuming
and expensive due to the significant number of such authorities and the
educational and testing processes involved, the Company does not believe that
regulations governing sewage and waste water discharges will prevent the use of
OREX Degradables. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX Degradables will not interfere with the
proper functioning of sewage treatment plants.
As the Company seeks to introduce its OREX products to industries other
than healthcare, the Company will be required to satisfy any applicable
regulatory requirements within such industries for the disposal of contaminated
OREX products. While the user of the Company's products and not the Company is
responsible for complying with these legal requirements, the Company's product
development efforts include analyzing compliance programs to facilitate sales of
the Company's products. For example, the Company is currently developing
products designed for use in the automotive painting industry and the nuclear
power industry. The processing of OREX materials contaminated with paint or
nuclear outfall is classified as hazardous which create significant engineering
challenges including, for example, a technology to separate the processed OREX
materials from the hazardous component of the contaminated materials. The
Company seeks to work with third parties to develop technologies to address
these challenges. With the help of third parties, the Company has engineered
systems to address these challenges which, based on preliminary testing, appears
to separate the hazardous component of other contaminated OREX material in the
processing stage. The Company, however, has not yet begun commercial sale of
these products, during which time additional challenges may be identified as a
part of the Company's efforts to commercialize these technologies.
Regulators at the federal, state and local level have imposed, are
currently considering and are expected to continue to impose regulations on
medical and other waste. No prediction can be made of the potential effect of
any such future regulations, and there can be no assurance that future
legislation or regulations will not increase the costs of the Company's products
or prohibit the sale or use of the Company's products, in either event having an
adverse effect on the Company's business.
Employees
- ---------
As of December 31, 1999, the Company employed approximately 1,311 full-time
employees and approximately 17 people as independent contractor sales
representatives. Of these employees, 78 were employed in marketing, sales and
customer support, 1,053 in manufacturing, 15 in research and development, and
165 in administrative positions. The Company believes its relationship with its
employees is good.
Insurance
The Company maintains commercial general liability protection insurance
which provides coverage with respect to product liability claims. The
manufacture and sale of the Company's products entail an inherent risk of
liability. The Company believes that its insurance is adequate in amount and
coverage. There can be no assurance that any future claims will not exceed
applicable insurance coverage. Furthermore, no assurance can be given that such
liability insurance will be available at a reasonable cost or that the Company
will be able to maintain adequate levels of liability insurance in the future.
In the event that claims in excess of these coverage amounts are incurred, they
could have a material adverse effect on the financial condition or results of
operations of the Company.
12
Environmental Matters
- ---------------------
The Company is not a party to any material environmental regulation
proceedings alleging that the Company has unlawfully discharged materials into
the environment. The Company does not anticipate the need for any material
capital expenditures for environmental control facilities during the next 18 to
24 months.
Risk Factors
- ------------
History of Net Losses.
While the Company reported net income for the year ended December 31, 1999,
the Company has a history of operating at a net loss. For each of the five years
ended December 31, 1998, the Company incurred net losses. The Company attributes
such operating performance in significant part to a failed strategy to
commercialize the Company's OREX Degradables products. The Company has
significantly changed its strategy to commercialize OREX Degradables, reflected
in part by the Company's divestiture of certain assets and businesses. The
Company sold $1.7 million of OREX Degradables products in 1999 and did not
realize any gross profit on those sales. Future investments in OREX Degradables
products or failed commercialization strategies could adversely affect operating
results in the future.
Marketing Risks affecting OREX Products.
Isolyser depends entirely on the efforts and success of Allegiance in
marketing OREX Degradables and Enviroguard products to healthcare markets
because Isolyser granted Allegiance an exclusive worldwide license to these
products in healthcare markets. Allegiance has not yet introduced these products
for commercial sale. If Allegiance does not perform in a manner satisfactory to
Isolyser in marketing these products, Isolyser may nevertheless be required to
await the expiration of that license at the end of 2002 or later to pursue an
alternative strategy to commercialize these products in healthcare markets.
While Allegiance is a leading supplier of disposable products to the healthcare
industry and has promised Isolyser that Allegiance will exercise efforts to
promote the OREX products, the success of OREX products in the healthcare
industry will depend upon numerous factors and is subject to many risks.
Similarly, developing a market in non-healthcare industries for OREX is subject
to many risks. These risks include:
o Because Isolyser does not currently sell significant quantities of
OREX products, commercialization of these products will require the
purchaser and user of these products to change their existing
purchasing patterns;
o To realize the full benefits of OREX Degradables products, users of
these products will be required to change the way in which they
dispose of these products by incorporating the OREX dissolution
process in disposal procedures;
o Isolyser may experience difficulties in its objective to provide a
regular supply of adequate quantities of product having uniformly
acceptable performance qualities which may cause Isolyser to lose
customers;
o Isolyser will need to provide appropriate regulatory and mechanical
support to customers to incorporate the processing technology
necessary to degrade OREX Degradables products after use, and Isolyser
may not be able to obtain regulatory approvals or engineer
satisfactory processing technology to support customers;
o Because Isolyser currently has commercially available only a limited
number of OREX Degradables products and therefore cannot currently
replace all traditional disposable products with OREX Degradables,
potential customers may not yet justify large-scale conversion to OREX
Degradables products;
o Past concerns with prior OREX Degradables product performance or
future deficiencies in performance of Isolyser's products may result
in the inability to convert new customers to OREX products or retain
existing customers;
13
o Long term supply contracts entered into by large hospital chains and
smaller collective buying groups, and corresponding customers in other
industries, may prohibit the successful marketing OREX Degradables to
such customers;
o Competitors may try to sell traditional disposable medical products at
prices which prevent the aggressive marketing and selling OREX
Degradables products; and
o Difficulties may be encountered in obtaining regulatory approvals
necessary to process OREX Degradables.
The Company has no significant experience in marketing OREX Degradable to
industries other than healthcare. In evaluating other industries to develop and
market OREX Degradables products, the Company seeks to identify third parties
which the Company believes have expertise or other strategic characteristics to
help commercialize OREX Degradables in that industry. Contracting with these
third parties may require the Company to grant exclusive rights to the third
party over the OREX technology within the applicable industry. For example, the
Company granted to RJ Hanlon exclusive global distribution rights to covers
manufactured from OREX film for robots used in automotive painting operations.
The license is dated June 14, 1999 and has a term of three years. If the Company
is not satisfied with the performance of RJ Hanlon, the Company may not be able
to cancel the agreement. In addition, marketing of OREX Degradables products in
industries other than the healthcare industry will encounter the same risks
described above for the healthcare industry. Other industries may have special
and additional risks, not currently known to Isolyser. For example, processing
of OREX Degradables used in the automotive paint industry requires special
processing to remove paint as paint is not permitted to flow into municipal
sewer systems.
The Company has not been successful to date in its efforts to obtain
substantial acceptance of its OREX Degradables products in their target markets.
There can be no assurance that the Company's products will achieve or maintain
substantial acceptance in their target markets. In addition to market
acceptance, various factors, including delays in improvements to products and
new product development and commercialization, delays in expansion of
manufacturing capability, new product introductions by competitors, price,
competition, delays in regulatory clearances and delays in expansion of sales
and distribution channels could materially adversely affect the Company's
operations and profitability. See "Business - Products and Markets", "-
Marketing and Distribution", and "Manufacturing and Supplies", and "Risk Factors
- - Manufacturing and Supply Risks".
Manufacturing and Supply Risks.
To relieve itself of the overhead burden associated with owning its own
manufacturing facilities, the Company sold its former OREX manufacturing
facilities and now depends entirely upon third parties to manufacture its OREX
Degradables and Enviroguard products. The Company does not have the ability to
manufacture these products. If the Company is not able to obtain its products
from its manufacturers, if such products do not comply with the specifications
or if the prices at which the Company purchase its products are not competitive
with traditional products, the Company's sales and profits will suffer. The
Company's license with Allegiance requires that it sell Enviroguard fabric to
Allegiance at a fixed cost regardless of costs charged to the Company by its
manufacturers.
The cost for OREX raw materials has been high. The raw material required to
manufacture OREX Degradables woven and non-woven products and Enviroguard is PVA
fiber, and the raw material required to manufacture OREX Degradables film and
thermoformed and extruded items is PVA resin and NDP. The Company obtains its
raw materials from various sources but risks exist in obtaining the quality and
quantity of PVA at a price that will allow the Company to be competitive with
manufacturers of conventional disposable and reuseable products. During 1996, an
anti-dumping order was issued which requires that domestic importers of PVA
resin post import bonds or pay cash deposits in the amount of certain scheduled
anti-dumping margins ranging from 19% to 116% of the raw material cost upon
importing such raw materials. These payments are not required for PVA fiber.
Such anti-dumping order may have resulted in increases to the Company's cost for
raw materials over that which might otherwise have prevailed. The prices for
these raw materials have affected the ability of the Company to be price
competitive with conventional disposable and reuseable products, both reducing
sales and adversely affecting profits.
The Company has entered into a contract requiring that it purchase certain
minimum quantities of PVA fiber at a fixed price over a four year period
expiring in 2002. The total remaining purchase obligation of the Company under
this contract is $1.4 million. The failure of the Company to sell adequate
quantities of OREX Degradables products could adversely affect the ability of
14
the Company to satisfy its obligations under this contract, thereby adversely
affecting the Company's operating results.
The Company does not have significant experience obtaining large,
commercial quantities of OREX Degradables and Enviroguard products to meet its
obligations, and the Company's third party manufacturers have not regularly
manufactured these products in the quantities required for commercial sales. The
Company might have difficulties in receiving adequate quantities of products,
receiving such products on schedule and having such products conform with its
requirements. The Company has entered into a contract with the owner of the
Company's former OREX non-woven roll goods manufacturing facility to supply a
thermobonded version of OREX non-woven roll goods, but does not have a contract
for the continuing supply of OREX Degradables towels. The Company has negotiated
a short-term contract for the continued supply of Enviroguard fabrics from one
supplier in China. The Company does not otherwise maintain contracts with its
suppliers for its OREX Degradables and Enviroguard products. To the extent the
Company does not hold a contract for the supply of its products, the Company may
be at a greater risk in obtaining its products and controlling its costs for
products. Production in China and elsewhere outside the United States exposes
the Company to risks related to currency fluctuations, political instability and
other risks inherent in manufacturing in foreign countries. Certain textiles and
similar products for material (including certain OREX Degradables woven
products) imported from China to the United States are subject to import quotas
which restrict total volume of such items available for import by the Company,
creating risks of limited availability and increased costs for certain OREX
Degradables woven products.
The Company's cost to manufacture OREX Degradable products to date have not
been acceptable. See "Risk Factors - History of Net Losses". There can be no
assurances that the Company will be able to reduce its cost to manufacture such
product. In addition, the Company has various obligations to supply OREX
products at a fixed cost regardless of costs incurred by the Company. For
example, the Company's agreement to supply OREX products to Allegiance provides
for a fixed supply cost. To date, the Company has been unable to manufacture
OREX Degradables film and thermoformed and extruded products at an acceptable
cost. The Company has recently begun to develop the use of new polymers, called
NDP, to test manufacture OREX Degradables film and thermoformed and extruded
products. While the Company has undertaken an evaluation of these new products,
no assurances can be provided that the Company will be successful in
manufacturing on a commercial basis OREX Degradables products from these
polymers or that such products will comply with applicable regulatory
requirements.
The Company's products must be manufactured in compliance with FDA and
other regulatory requirements while maintaining product quality at an acceptable
manufacturing cost. There can be no assurance that manufacturing or quality
control problems will not arise at manufacturing plants used to supply the
Company's products, or that the Company's manufacturers will be able to maintain
the necessary licenses from governmental authorities to continue to manufacture
OREX Degradables products.
The Company has from time to time experienced delays in manufacturing
certain OREX Degradables products. The Company has also from time to time
encountered dissatisfaction with certain quality or performance characteristics
of its products. These delays and quality or performance issues have resulted in
the loss of customers. There can be no assurance that future delays or quality
concerns will not occur or that past customer relations on these products will
not adversely affect future customer relations and operating results.
The Company is continually in the process of making improvements to its
technologies and systems for manufacturing its OREX Degradables products, while
simultaneously marketing and supplying various of these products. From time to
time, the Company has invested in inventory of certain OREX Degradables products
which subsequently have been rendered obsolete by improvements in manufacturing
technologies and systems. There can be no assurances that possible future
improvements in manufacturing processes or products will not render other
inventories of product obsolete, thereby adversely affecting the Company's
financial statements.
The production of the Company's products is based in part upon technology
that the Company believes to be proprietary. The Company has provided this
technology to contract manufacturers, on a confidential basis and subject to use
restrictions, to enable them to manufacture products for the Company. There can
be no assurance that such manufacturers or other recipients of such information
will abide by any confidentiality or use restrictions.
15
Protection of Technologies.
The Company's success will depend in part on its ability to protect its
technologies. The Company relies on a combination of trade secret law,
proprietary know-how, non-disclosure and other contractual provisions and
patents to protect its technologies. Failure to adequately protect its patents
and other proprietary technologies, including particularly the Company's
intellectual property concerning its OREX Degradables, could have a material
adverse effect on the Company and its operations. The Company holds various
issued patents and has various patent applications pending relative to its OREX
Degradables products. See "Business Technology and Intellectual Property".
Although management believes that the Company's patents and patent
applications provide or will provide adequate protection, there can be no
assurance that any of the Company's patents will prove to be valid and
enforceable, that any patent will provide adequate protection for the
technology, process or product it is intended to cover or that any patents will
be issued as a result of pending or future applications. Failure to obtain the
patents pursuant to the Company's patent applications could have a material
adverse effect on the Company and its operations. It is also possible that
competitors will be able to develop materials, processes or products, including
other methods of disposing of contaminated waste, outside the patent protection
the Company has or may obtain, or that such competitors may circumvent, or
successfully challenge the validity of, patents issued to the Company. Although
there is a statutory presumption of a patent's validity, the issuance of a
patent is not conclusive as to its validity or as to the enforceable scope of
the claims of the patent. In the event that another party infringes the
Company's patent or trade secret rights, the enforcement of such right is
generally at the option of the Company and can be a lengthy and costly process,
with no guarantee of success. Further, no assurance can be given that the
Company's other protection strategies such as confidentiality agreements will be
effective in protecting the Company's technologies. Due to such factors, no
assurance can be given that the various components of the Company's technology
protection arrangements utilized by the Company, including its patents, will be
successful in preventing other companies from making products competitive with
those offered by the Company, including OREX Degradables.
Although to date no claims have been brought against the Company alleging
that its technology or products infringe upon the intellectual property rights
of others, there can be no assurance that such claims will not be brought
against the Company in the future, or that any such claims will not be
successful. If such a claim were successful, the Company's business could be
materially adversely affected. In addition to any potential monetary liability
for damages, the Company could be required to obtain a license in order to
continue to manufacture or market the product or products in question or could
be enjoined from making or selling such product or products if such a license
were not made available on acceptable terms. If the Company becomes involved in
such litigation, it may require significant Company resources, which may
materially adversely affect the Company. See "Business Technology and
Intellectual Property".
Competition.
To date, substantially all of the Company's sales have been to the
healthcare industry. The healthcare industry is highly competitive. There are
many companies engaged in the development, manufacturing and marketing of
products and technologies that are competitive with the Company's products and
technologies. Many such competitors are large companies with significantly
greater financial resources than the Company. Sellers and purchasers of medical
products have undergone consolidations in recent years, resulting in increasing
concentration of the market for disposable medical products with a few companies
and increasing cost pressures. This industry trend may place the Company at a
competitive disadvantage. The Company believes that these trends have adversely
affected the Company's ability to adjust its prices for its OREX Degradables
products to take into account disposal cost savings provided by such products,
in addition to adversely affecting the Company's ability to successfully
penetrate potential customer accounts. The market for disposable medical
products is very large and important to the Company's competitors. Certain of
the Company's competitors serve as the sole distributor of products to a
significant number of hospitals.
The Company seeks to sell its OREX Degradables products to industries other
than healthcare, and the Company has virtually no presence in these other
industries at this time. Therefore, the Company will be required to displace
sales of competitive products in these other industries to gain market presence.
There can be no assurance that the Company's competitors will not substantially
increase the resources devoted to the development, manufacturing and marketing
of products competitive with the Company's products. The successful
implementation of such strategy by one or more of the Company's competitors
16
could have a material adverse effect on the Company. See "Business -
Competition".
Risks of Technological Obsolescence.
Many companies are engaged in the development of products and technologies
to address the need for safe and cost-effective disposal of potentially
infectious and hazardous waste. There can be no assurance that superior disposal
technologies will not be developed or that alternative approaches will not prove
superior to the Company's products. The Company's products could be rendered
obsolete by such developments, which would have a material adverse effect on the
Company's operations and profitability.
Reliance Upon Distributors.
The Company has historically relied on large distributors for the
distribution of its products. Hospitals purchase most of their products from a
few large distributors. Of these distributors, only Allegiance accounted for
more than 10% of the Company's total sales during 1999. If the efforts of the
Company's distributors prove unsuccessful, or if such distributors abandon or
limit their distribution of the Company's products, the Company's sales may be
materially adversely affected. Recent regulatory developments regarding the
Company's LTS products described under "Business - Government Regulation" may
have caused Allegiance to substantially reduce its purchases of the Company's
existing LTS products. The Company believes that Allegiance may have begun to
purchase products competitive with those of LTS manufactured by a third party
which have been registered with the Environmental Protection Agency. Until 1996,
Allegiance was the sole distributor for the Company's LTS products and remains
the most significant distributor of such products. Reduction of such purchases
by Allegiance has had a material adverse effect upon the Company's operating
results. Purchases of all products by Allegiance from Microtek during 1999
represented 25.4% of Microtek's 1999 net sales. This includes products
manufactured by Microtek for Allegiance on a temporary basis which represented
10.4% of Microtek's net sales in 1999. Accordingly, Microtek will be required to
replace these sales in order to increase its net sales during 2000 and maintain
operating efficiencies created by larger volume of production in Microtek's
manufacturing facilities. The relationships between the Company and Allegiance
with regard to LTS and the Company's infection control products, as well as the
license granted to Allegiance for OREX products, make the Company substantially
dependent upon Allegiance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Regulatory Risks.
The development, manufacture and marketing of the Company's products are
subject to extensive government regulation in the United States by federal,
state and local agencies including the EPA, the FDA and state and local sewage
treatment plants. Similar regulatory agencies exist in other countries with a
wide variety of regulatory review processes and procedures, concerning which the
Company relies to a substantial extent on the experience and expertise of local
product dealers, distributors or agents to ensure compliance with foreign
regulatory requirements. The process of obtaining and maintaining FDA and any
other required regulatory clearances or approvals of the Company's products is
lengthy, expensive and uncertain, and regulatory authorities may delay or
prevent product introductions or require additional tests prior to introduction.
The FDA has issued to the Company 510(k) clearances on OREX Degradables products
for surgical sponges, operating room towels, drapes, gowns, surgeon's caps,
surgeon's vests, shoe covers and medical bedding. The Company is currently
developing, evaluating and testing certain OREX Degradables film and
thermoformed or extruded OREX products manufactured from non-PVA polymers, and
it is possible that new 510(k) clearances will be required for such products.
There can be no assurance as to when, or if, other such 510(k) clearances
necessary for the Company to market products developed by it in the future will
be issued by the FDA. The FDA also requires healthcare companies to satisfy the
quality system regulation. Failure to comply with applicable regulatory
requirements, which may be ambiguous or unclear, can result in fines, civil and
criminal penalties, stop sale orders, loss or denial of approvals and recalls or
seizures of products. There can be no assurance that changes in existing
regulations or the adoption of new regulations will not occur, which could
prevent the Company from obtaining approval for (or delay the approval of)
various products or could affect market demand for the Company's products.
Developments regarding the Company's LTS products have had and could
continue to have a material adverse effect upon the Company's operating results.
In November, 1997, the State of California revoked its approval for direct
landfill disposal (without sterilization) of LTS-treated waste within such
state. In February 1998 EPA announced a new policy that FIFRA requires that
products, such as LTS, which hold state approvals related to anti-microbial
efficacy, such as state approvals for landfill of LTS-treated waste, impliedly
17
make claims about killing microorganisms which would require that LTS be
registered under FIFRA. LTS has not been registered under FIFRA and, based in
part on meetings by the Company with the EPA, the Company continues to sell LTS
without such registration. The Company now is marketing LTS without relying upon
any state approvals for direct landfill disposal. The Company also is in the
process of seeking expedited registration of a new version of LTS under FIFRA,
and recently obtained conditional approval of registration of such product under
FIFRA by the EPA. The Company must still seek numerous state and local
registrations of such new LTS product to allow such product to be landfilled in
such places. Further, there can be no assurances that the Company will be
successful in obtaining registration of its LTS product. The EPA's change in
policy could cause the Company to become subject to an order to stop sales of
LTS or be subject to fines, penalties or other regulatory enforcement
procedures, any one or more of which could have a material adverse effect on the
Company and its results of operations.
Users of OREX Processors may be subject to regulation by local sewage
treatment plants to the extent that discharges from OREX Processors may
interfere with the proper functioning of such plants. In the Company's license
of OREX Degradables products to Allegiance, the Company has agreed to seek
regulatory approval for the disposal of OREX Degradables by the sanitary sewer
systems in the United States and Canada, the European Community countries and
Japan. If Isolyser fails to obtain such approvals within certain specific
territories within certain specified time frames, Allegiance's minimum purchase
obligation under the license will be reduced. The Company has approached
numerous sewage treatment plants requesting their approval to dispose of OREX
Degradables through the municipal sewer system. Although the Company has
obtained a total of over 100 non-binding written and verbal concurrences from
sewage treatment plants, certain of the founder hospitals and other hospitals
who have indicated an interest in purchasing OREX Degradables and an OREX
Processor are located in municipalities where such approvals have not been, and
may never be, obtained. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX products will not interfere with the
proper functioning of sewage treatment plants thereby adversely affecting the
Company's ability to successfully commercialize such newly developing OREX
Degradables technology. There can be no assurance that disposal of OREX
Degradables in areas where these approvals have not been granted will not result
in fines, penalties or other sanctions against product users or adversely affect
market demand for the Company's products.
Introduction of the Company's OREX Degradables products into non-healthcare
industries will require compliance with additional regulatory requirements.
While the Company seeks to engage the services of companies having expertise in
engineering systems to comply with these regulatory requirements, the Company
may not be able to develop satisfactory solutions to regulatory requirements at
an acceptable cost. Until the Company commences commercial sales of products,
the Company may not be able to anticipate all requirements to successfully
commercialize OREX Degradables in these other industries. Accordingly, no
assurances can be provided that OREX Degradables will be an attractive product
to non-healthcare industries.
Environmental Matters.
The Company is subject to various federal, state, local and foreign
environmental laws and regulations governing the discharge, storage, handling
and disposal of a variety of substances and waste used in or generated by the
Company's operations. There can be no assurance that environmental requirements
will not become more stringent in the future or that the Company will not incur
substantial costs in the future to comply with such requirements or that future
acquisitions by the Company will not present potential environmental
liabilities.
Healthcare Reform.
The federal government and the public have recently focused considerable
attention on reforming the healthcare system in the United States. The current
administration has pledged to bring about a reform of the nation's healthcare
system and, in September 1993, the President outlined the administration's plan
for healthcare reform. Included in the proposal were calls to control or reduce
public and private spending on healthcare, to reform the payment methodology for
healthcare goods and services by both the public (Medicare and Medicaid) and
private sectors, which may include overall limitations on federal spending for
healthcare benefits, and to provide universal access to healthcare. A number of
other healthcare proposals have been advanced by members of both Houses of
Congress. The Company cannot predict the healthcare reforms that ultimately may
be enacted nor the effect any such reforms may have on its business. No
assurance can be given that any such reforms will not have a material adverse
effect on the Company.
18
Product Liability.
The manufacture and sale of the Company's products entail an inherent risk
of liability. Product liability claims may be asserted against the Company in
the event that the use of the Company's products are alleged to have resulted in
injury or other adverse effects, and such claims may involve large amounts of
alleged damages and significant defense costs. Although the Company currently
maintains product liability insurance providing coverage for such claims, there
can be no assurance that the liability limits or the scope of the Company's
insurance policy will be adequate to protect against such potential claims. In
addition, the Company's insurance policies must be renewed annually. While the
Company has been able to obtain product liability insurance in the past, such
insurance varies in cost, is difficult to obtain and may not be available on
commercially reasonable terms in the future, if it is available at all. A
successful claim against the Company in excess of its available insurance
coverage could have a material adverse effect on the Company. In addition, the
Company's business reputation could be adversely affected by product liability
claims, regardless of their merit or eventual outcome. See "Business -
Insurance".
Dependence on Key Personnel.
The Company believes that its ability to succeed will depend to a
significant extent upon the continued services of a limited number of key
personnel, and the ability of the Company to attract and retain key personnel.
The loss of the services of any one or more of these individuals or the failure
to attract and retain such individuals could have a material adverse effect upon
the Company.
Claims Arising from Divestitures.
Over the past two years, the Company has sold several of its former
businesses including the Company's White Knight subsidiary, the Company's
SafeWaste subsidiary, the Company's OREX materials manufacturing facilities and
the Company's procedure tray business. In connection with these sales, the
Company entered into various agreements with purchasers to indemnify the
purchasers against certain matters including without limitation undisclosed
liabilities and breaches of representations and warranties by Isolyser. The
Company is not aware of any claims for indemnification in connection with these
transactions except that Allegiance has made certain claims relative to product
returns of excess inventories, failure to disclose certain lost customer
accounts and failure to complete certain manufacturing assembly services under a
temporary manufacturing contract. Under the terms of the contract with
Allegiance, and in addition to Isolyser's general indemnification obligations to
Allegiance, the Company deposited $3.1 million in escrow at the July 12, 1999
closing and an additional $1.2 million on February 16, 2000, to secure potential
indemnification obligations. The Company has denied that it has any liability to
Allegiance for the matters claimed by Allegiance and remains in discussions with
Allegiance to reach a satisfactory resolution of Allegiance's claims and
maintain a positive overall business relationship with Allegiance. The ultimate
outcome of these claims and discussions remains impossible to predict, and could
be resolved unfavorably to Isolyser.
Anti-Takeover Provisions.
On December 19, 1996, the Company's Board of Directors adopted a
Shareholder Protection Rights Agreement (the "Rights Agreement"). Under the
Rights Agreement, a dividend of one right ("Right") to purchase a fraction of a
share of a newly created class of preferred stock was declared for each share of
common stock outstanding at the close of business on December 31, 1996. The
Rights, which expire on December 31, 2006, may be exercised only if certain
conditions are met, such as the acquisition (or the announcement of a tender
offer the consummation of which would result in the acquisition) of beneficial
ownership of 15 percent or more of the common stock ("15% Acquisition") of the
Company by a person or affiliated group. The Rights, if exercised, would cause
substantial dilution to a person or group of persons that attempts to acquire
the Company without the prior approval of the Board of Directors. The Board of
Directors may cause the Company to redeem the Rights for nominal consideration,
subject to certain exceptions. The Rights Agreement may discourage or make more
difficult any attempt by a person or group of persons to obtain control of the
Company.
ITEM 2. PROPERTIES
The Company maintains approximately 32,000 square feet of office,
manufacturing, production, research and development and warehouse space located
in Norcross, Georgia under a lease which expires December 30, 2001. The Company
consolidated its administrative offices to this Norcross facility during 1998 in
19
connection with the sale of its former administrative offices. The Company also
leases from a local economic development authority a 13,300 square foot
administrative building located in Columbus, Mississippi under a lease which
expires December 31, 2007.
The Company conducts its equipment drape and fluid control manufacturing
business from three locations. In Columbus, Mississippi the Company owns an
80,000 square foot manufacturing building and leases on a month-to-month basis a
25,000 square foot warehouse facility. The Company leases four manufacturing
facilities totaling 59,000 square feet located in the Dominican Republic which
expire at various dates through 2007. The Company leases a 43,000 square foot
facility located in Empalme, Mexico, where it manufactures equipment drape and
fluid control products. Such lease expires February 1, 2001.
The Company also leases approximately 69,000 square feet of warehouse and
distribution space in Jacksonville, Florida. The Company uses this facility for
distribution of finished products, distribution of materials to the Company's
Dominican Republic facility and light manufacturing under a lease expiring April
30, 2003.
Through a subsidiary, the Company leases approximately 9,000 square feet of
space near Manchester, England, approximately 7,000 of which is used for
warehouse space and 2,000 of which is used for office space.
The Company believes that its present facilities are adequate for its
current requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation and legal
proceedings in the ordinary course of business. Such litigation and legal
proceedings have not resulted in any material losses to date, and the Company
does not believe that the outcome of any existing lawsuits will have a material
adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the Company's
shareholders during the three months ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is traded and quoted on The Nasdaq Stock Market under the
symbol "OREX". The following table shows the quarterly range of high and low
sales prices of the common stock during the periods indicated since December 31,
1997.
Common Stock
Quarter Ended High Low
------------- ---- ---
1999
First Quarter $3.25 $1.06
Second Quarter $5.00 $2.28
Third Quarter $4.94 $3.13
Fourth Quarter $4.00 $2.31
1998
First Quarter $3.93 $2.31
Second Quarter $3.00 $2.03
Third Quarter $3.06 $1.12
Fourth Quarter $2.00 $1.03
On March 17, 2000, the closing sales price for the common stock as reported
by The Nasdaq Stock Market was $5.875 per share.
As of March 17, 2000, the Company had approximately 18,400 shareholders,
including approximately 1,400 shareholders of record and 17,000 persons or
entities holding the Company's common stock in nominee name.
20
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. Moreover, the Company's
credit facility prohibits the Company from declaring or paying cash dividends
without the prior written consent of its lenders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". Accordingly, the Company does not intend to pay cash
dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary historical financial data for each
of the five years in the period ended December 31, 1999. As a result of the 1996
acquisition of Microtek, which was accounted for as a pooling of interests, the
Company's financial statements have been restated to include the results of
Microtek for all periods presented. The operations data for the year ended
December 31, 1995 includes only partial operating results of SafeWaste and White
Knight because these acquisitions occurred effective May 31, 1995 and September
1, 1995, respectively. On July 1, 1995, the Company acquired the infection
control drape line of Xomed in exchange for Microtek's otology product line and
the operations data for the year ended December 31, 1995 therefore includes only
partial operating results for such acquisition transaction. The operations data
for the year ended December 31, 1995 does not give effect to the November 30,
1995 acquisition of Medi-Plast International, Inc. ("Medi-Plast"), as such
acquisition was consummated at Microtek's fiscal year end on November 30, 1995.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., and the Company's results of operations include the results
of Venodyne only from the April 27, 1996 acquisition date. Additionally, during
1999 the Company disposed of substantially all of the assets of its MedSurg
subsidiary and all of its capital stock in its White Knight subsidiary, and
during 1998 the Company disposed of its Arden and Charlotte, North Carolina and
Abbeville, South Carolina manufacturing facilities, its industrial and Struble &
Moffitt divisions of its White Knight subsidiary, and substantially all of the
net assets of its SafeWaste subsidiary. The summary historical financial data
should be read in conjunction with the historical consolidated financial
statements of the Company and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data appearing elsewhere in this Form 10-K. The summary
historical financial data for each of the five years in the period ended
December 31, 1999 has been derived from the Company's audited consolidated
financial statements.
21
Year Ended December 31,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales .................................... $ 104,874 $ 164,906 $ 159,940 $ 147,643 $ 97,554
Licensing revenues ........................... -- -- -- -- 1,500
--------- --------- --------- --------- ---------
Total revenues ......................... 104,874 164,906 159,940 147,643 99,054
Cost of goods sold ........................... 74,953 128,598 142,094 109,936 61,970
--------- --------- --------- --------- ---------
Gross Profit ...................... 21 36,308 17,846 37,707 37,084
Operating expenses
Selling, general and administrative..... 27,737 41,381 43,422 40,182 26,596
Research and development ............... 1,127 2,173 2,601 3,906 3,724
Amortization of intangibles ............ 2,411 4,290 3,847 2,052 1,440
Impairment loss ..................... -- -- 57,310 7,445 769
Restructuring charge ................... -- 4,410 -- -- --
Costs associated with merger ........... -- 3,372 -- --
Gain on business disposition ........... -- -- -- -- (628)
-------- --------- --------- --------- ---------
Total operating expenses............ 31,275 55,626 107,180 53,585 31,901
--------- --------- --------- --------- ---------
Income (loss) from operations....... (1,354) (19,318) (89,334) (15,878) 5,183
Net other income (expense) ................... 1,790 (1,316) (3,415) (3,223) (1,195)
--------- --------- --------- --------- ---------
Income (loss) before tax, extraordinary
items and cumulative effect of change
in accounting principle ................... 436 (20,634) (92,749) (19,101) 3,988
Income tax provision (benefit) ............ 980 (639) 354 540 1,291
--------- ---------- --------- --------- ---------
Income (loss) before extraordinary items
and cumulative effect of change in ........ (544) (19,995) (93,103) (19,641) 2,697
accounting principle
Extraordinary items (1) ...................... -- 457 -- (1,404) --
Cumulative effect of change
in accounting principle (2) ............. -- -- 800 -- --
------- --------- --------- --------- ---------
Net income (loss) ......................... $ (544) $ (20,452) $ (93,903) $ (18,237) $ 2,697
========= ========= ========= ========= =========
Net income (loss) per common equivalent share -
Basic and Diluted
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle .......... $ (0.02) $ (0.52) $ (2.37) $ (0.49) $ 0.07
Extraordinary items ..................... -- (0.01) -- 0.03 --
Cumulative effect of change in
accounting principle .................... -- -- (0.02) -- --
--------- --------- ------------- ---------- ----------
Net income (loss) per common equivalent share. $ (0.02) $ (0.53) (2.39) $ (0.46) $ 0.07
========== ========== ============= ========== ==========
Weighted average number of common and
common equivalent shares outstanding - basic 33,704 38,763 39,273 39,655 40,318
Weighted average number of common and
common equivalent shares outstanding
- diluted .................................. 33,704 38,763 39,273 39,655 41,158
- -----------------
(1) Gives effect to the gain from the extinguishment of debt in 1998 and the
loss from refinancing of Isolyser's and Microtek's credit facilities, net
of tax benefits of $332 in 1996.
(2) Reflects the adoption of Emerging Issues Task Force ("EITF") Consensus No.
97-13, "Accounting for Costs in Connection with a Consulting Contract or an
Internal Process that Combines Processing Reeingineering and Information
Technology Costs Transformation."
22
Year Ended December 31,
------------------------------------------------------------------------------
1995 1996 1997 (1) 1998 (2) 1999
---- ---- -------- -------- ----
Balance Sheet Data:
(in thousands)
Working Capital .................. $ 101,022 $ 91,962 $ 72,408 $ 39,124 $ 45,550
Intangible assets, net ........... 60,004 57,331 30,803 29,128 23,071
Total assets ..................... 253,261 250,935 144,334 109,518 95,339
Long-term debt ................... 26,413 47,029 37,546 19,376 --
Total shareholders' equity ....... $ 195,298 $ 178,804 $ 86,117 $ 68,675 $ 74,722
(1) Pursuant to $ 35.8121million of netclassified assets related to its OREX
manufacturing facilities and White Knight subsidiary as held for sale, and
included such amount in current assets.
(2) Pursuant to SFAS No. 121 the Company classified $9.9 million of net assets
related to its White Knight subsidiary and its former headquarters building
as held for sale, and included such amounts in current assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The Company was incorporated in 1987 and commenced operations in 1988 with
the introduction of its SMS products. In 1990, the Company introduced its LTS
products and thereafter introduced others of its safety products and services.
During 1993, the Company completed the acquisition of two procedure tray
businesses and began to sell standard and custom procedure trays.
On July 1, 1995, Microtek acquired the infection control drape line of
Xomed, in exchange for Microtek's otology product line, thereby providing
Microtek greater concentration on its core business. On September 1, 1995,
Isolyser acquired White Knight and began the conversion manufacturing of
non-woven fabric into finished goods such as drapes and gowns. On November 30,
1995, Microtek acquired Medi-Plast, a manufacturer of equipment drapes. Because
these acquisitions were accounted for using the purchase method, the Company's
operating results do not include the operating results of the acquired
operations for periods prior to these respective acquisition dates.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., which manufactures and markets pneumatic pumps and disposable
compression sleeves for use in reducing deep vein thrombosis, and the Company's
results of operations include the results of Venodyne only from the April 27,
1996 acquisition date. Effective September 1, 1996, Isolyser completed its
merger with Microtek, which was accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated for all
periods to combine the financial statements of each of Isolyser and Microtek.
In March 1998, the Company announced a plan to dispose of its OREX
manufacturing facilities and its White Knight subsidiary. In August 1998, the
Company disposed of its Arden and Charlotte, North Carolina OREX manufacturing
facilities, and substantially all of the net assets of the industrial division
of its White Knight subsidiary and its SafeWaste subsidiary. In 1998 the Company
disposed of the Struble & Moffitt division of its White Knight subsidiary. In
October 1998, the Company disposed of its Abbeville, South Carolina OREX
manufacturing facility. The Company maintains a 19.5% minority interest in the
company formed to own and operate the Abbeville and Arden facilities.
On March 31, 1999, the Company disposed of its former corporate
headquarters in Norcross, Georgia. Effective May 31, 1999, the Company disposed
of the stock of its White Knight subsidiary. On July 12, 1999, the Company sold
substantially all of the assets of MedSurg to Allegiance and granted to
Allegiance an exclusive worldwide license to the Company's proprietary
technologies to manufacture, use and sell products made from material which can
be dissolved and disposed of through sanitary sewer systems for healthcare
applications.
23
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net revenues for 1999 were $99.1 million compared to $147.6 million for
1998, a decline of 32.9%. Excluding sales of businesses sold during 1998 or
1999, net sales in 1999 increased 21.2% over net revenues in 1998. Sales of
Microtek products increased to $49.8 million during 1999 as compared to $42.1
million during 1998, an increase of 18.4%. This increase was primarily a result
of new business from a short-term manufacturing contract arrangement with
Allegiance. Sales of the Company's safety products were 4.3% lower in 1999 than
1998. This decrease was due to continuing reduction in purchases of safety
products by Allegiance during portions of 1998 and 1999.
Included in 1999 revenues are $1.5 million of licensing revenue associated
with the amortization of $10.5 million payment by Allegiance allocated to the
Company's Supply and License Agreement with Allegiance and $1.7 million in sales
of OREX Degradables during 1999. Sales of OREX Degradables in 1999 did not
contribute any gross profits to the Company's operating results. The Company
believes that Allegiance will commence the introduction of Enviroguard products
for which the Company supplies materials to Allegiance during the second quarter
of 2000, and that the product line will gradually roll out over the balance of
2000. Other than with respect to the license fee amortization, the Company does
not expect the volume of purchases through 2000 under the Company's agreement
with Allegiance to produce any gross profits. To the extent any indemnification
claims by Allegiance are satisfied by payments or applications of funds in
escrow, the license fee amortization will be reduced proportionately. The
Company's ability to successfully manufacture, supply and expand its OREX
Degradables line of products at acceptable profit margins remains subject to
risks. See "Risk Factors - History of Net Losses", "- Marketing Risks Affecting
OREX Products", "-Manufacturing and Supply Risks" and "-Claims Arising from
Divestitures".
Sales of the Company's safety products have been materially adversely
affected by the substantial reduction in purchases of LTS products by the
Allegiance division of Cardinal Healthcare, the largest distributor of such
products, and the previously reported adverse regulatory developments related to
the change in policy by the EPA requiring registration of the new LTS-Plus
product prior to its introduction into the market. This policy change by EPA
also forced the withdrawal of all landfill approvals for conventional LTS
products in mid-1998. LTS-Plus, the new generation treatment product, is fully
developed and tested and will be ready for market as soon as full regulatory
approval has been acquired by state regulatory agencies. Since this approval
process is different in every state, there is no set timetable for the
completion of the regulatory approval process. See "Risk Factors - Reliance Upon
Distributors"