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815973v6
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number: 0-24866
ISOLYSER COMPANY, INC.
(Exact Name of registrant as specified in its charter)
GEORGIA 58-1746149
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4320 INTERNATIONAL BOULEVARD
NORCROSS, GEORGIA 30093
(Address of principal executive offices) (Zip Code)
(770) 806-9898
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.001 par value per share
stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of common stock held by nonaffiliates of the
registrant based on the sale trade price of the common stock as reported on The
Nasdaq Stock Market on March 25, 1999, was approximately $67.9 million. For
purposes of this computation, all officers, directors and 5% beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors or 5% beneficial owners are,
in fact, affiliates of the registrant.
At March 25, 1999, there were outstanding 40,077,412 shares of the registrant's
common stock, $.001 par value per share.
Documents incorporated by reference: Certain exhibits provided in Part IV are
incorporated by reference from the Company's Registration Statements on Form S-1
(File Nos. 33-83474 and 33-97086), Registration Statement on Form S-4 (File No.
333-7977), Registration Statement on Form S-8 (File Nos. 33-85668), annual
report on Form 10-K for the periods ended December 31, 1994, December 31, 1995,
December 31, 1996, and December 31, 1997, quarterly report on Form 10-Q for the
period ended March 31, 1998, and current reports on Form 8-K dated May 31, 1995,
September 18, 1995, June 4, 1996, August 30, 1996, December 19, 1996, and August
11, 1998.
Note: The discussions in this Form 10-K contain forward-looking
statements that involve risks and uncertainties. The actual results of Isolyser
Company, Inc. and subsidiaries (the "Company") could differ significantly from
those set forth herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Business",
particularly "Business - Risk Factors", and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere in this Form 10-K. Statements contained in this Form 10-K
that are not historical facts are forward-looking statements that are subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.
A number of important factors could cause the Company's actual results for 1999
and beyond to differ materially from those expressed or implied in any forward-
looking statements made by, or on behalf of, the Company. These factors include,
without limitation, those listed in "Business - Risk Factors" in this Form 10-K.
PART I
ITEM 1. BUSINESS
General
Isolyser Company, Inc. ("Isolyser" or the "Company") believes that it
is the first company to address the health care industry's fundamental needs of
patient care, safety, cost reduction and solid waste reduction by taking a life
cycle approach (from product development through disposal) to disposable
products used in the hospital. Isolyser develops, manufactures and markets
proprietary and other products for patient care, occupational safety and
management of potentially infectious and hazardous waste. The Company's products
provide patient care and safety benefits, including protection from
cross-infection, by providing Point-of-Generation(TM) treatment of potentially
infectious and hazardous waste. Moreover, the Company believes that its products
benefit the environment by reducing the volume of solid waste while
significantly reducing the disposal costs of such waste. Isolyser's products are
designed to provide responsible solutions to regulatory requirements and
initiatives and social concerns. Through its products and services, the Company
seeks to provide an umbrella of protection from potentially infectious and
hazardous waste for patients, staff, the public and the environment. The Company
also believes that its products offer benefits to certain industries whose
workers are in contact with hazardous materials and where contaminated clothing,
clean-up and barrier materials must be incinerated at considerable expense.
Business Strategy
The Company's goal is to become a leading developer of ecologically
beneficial degradable materials, products and services. The Company intends to
improve its operating results through the commercialization of OREX Degradables,
increased focus upon the Company's core businesses, planned dispositions of
underperforming assets and businesses, and continued new product development.
See "Risk Factors".
Commercializing OREX Degradables. The Company seeks to penetrate the
market for traditional disposable and reusable products by converting users of
those products to OREX Degradables, and has in the past sought to achieve that
objective with an initial primary focus on the health care industry. The Company
has sought to accomplish this goal by replacing conventional disposable and
reusable products used in procedure trays with OREX Degradables and selling OREX
Degradables on a stand-alone basis and in supplemental packs. Since 1997, the
Company has substantially reduced efforts to increase sales of OREX Degradables
while, among other things, seeking to preserve its existing base of hospitals
purchasing OREX Degradables and evaluating means to exploit the market position
of OREX Degradables within its various market potentials. The Company intends to
continue its investment in OREX Degradables by seeking to improve its line of
OREX products, identifying manufacturing and marketing opportunities which
achieve satisfactory profit margins on such products, and seeking to form and
continually support strategic alliances designed to advance the
commercialization of OREX Degradables. The Company continues to evaluate
manufacturing techniques to improve the quality of OREX products and reduce
manufacturing costs, while identifying and seeking access to more profitable
markets for its OREX products, both through strategic alliances and its
independent resources. There can be no assurance that OREX Degradables will
achieve or maintain substantial acceptance in their target markets. See "Risk
Factors - Limited Operating History; Net Losses" and "- Risks of New Products".
Increased Focus on Core Businesses. In 1998 the Company implemented a
revised business structure which includes the creation within the Company of
three business units, namely (1) OREX commercial development under a division
called OREX Technologies International, (2) Infection Control and (3) Product
Packaging (including procedure trays). In addition to creating a business unit
dedicated to OREX commercialization as described above, this structure
facilitates accountability and increases focus on achieving improved operating
results within each business unit.
Completed and Planned Dispositions. During 1998, the Company completed
several previously announced planned divestitures to provide funds to reduce
debt, relieve the Company of the burdens associated with underperforming assets
and providing increased focus upon the Company's remaining business units
described above. Over the course of 1998, the Company concluded the sale of
various assets including its Arden and Charlotte, North Carolina and Abbeville,
South Carolina materials manufacturing plants, assets associated with the
Company's SafeWaste Corporation ("SafeWaste") subsidiary, and the industrial and
Struble & Moffitt divisions of its White Knight Healthcare, Inc. ("White
Knight") subsidiary. The Company has contracted to sell its administrative
office building located in Norcross, Georgia, after consolidating such
administrative requirements with its research and development facilities located
nearby. The Company may in the future pursue other divestiture transactions if
the Company believes that such transactions will promote the Company's
objectives to reduce debt, relieve the Company of burdens associated with
underperforming assets and increase the Company's ability to improve the
operating results of its remaining business units. See "Risk Factors - Risks of
Planned Divestitures".
Continuing New Product Development. The Company plans to continue to
improve, develop and introduce new and innovative products to the marketplace
designed to promote cost-effective achievement of occupational safety,
environmental protection and regulatory compliance objectives through continued
research and development. In addition, the Company will continue to substantiate
the safety and effectiveness of its products with testing and to seek regulatory
approval for use of its products where applicable. See "Risk Factors - Risks of
New Products" and "- Regulatory Risks".
Products and Markets
OREX Degradables
OREX Degradables are a line of products that provide protection to
people and the environment while providing cost effective solutions to the
problems associated with solid waste reduction and disposal. OREX Degradables
are manufactured from a thermoplastic, hot water soluble polymer, which can be
configured into an array of products such as woven fabrics (including operating
room towels, absorbent gauze and laparotomy sponges), non-woven fabrics
(including gowns, surgical drapes, mop heads and surgical headwear), films
(including fluid collection bags, packaging materials and equipment drapes),
thermoformed and extruded items (including syringes, bowls, instruments and
tubing) as well as combinations of these configurations (including diapers,
underpads and laminates). OREX Degradables perform like traditional disposable
and reusable products; however, unlike traditional products, OREX Degradables
can be degraded or dissolved in hot water in a specially designed washing
machine (the OREX Processor) after use for safe disposal through the municipal
sewer system. See "Risk Factors - Limited Operating History; Net Losses," "-
Risks of New Products", "- Manufacturing and Supply Risks" and "- Regulatory
Risks".
The Company has been initially focused on delivering OREX Degradables
to the health care industry. While independent market research has estimated a
substantial United States market for non-woven disposable medical products, the
Company currently believes that OREX Degradables may be best suited for use
within a subset of such health care market at hospitals willing to purchase OREX
Degradables at a price which reflects the added benefits of degradable products
such as facilitating environmental protection, complying with regulations and
saving on infectious waste disposal costs. Management also believes that the
technology used to develop OREX Degradables has the potential for broad
commercial applications beyond the health care industry where protection from
potentially infectious or hazardous waste and reduction of solid waste is
important, such as the nuclear power industry. See "Risk Factors - Risks of New
Products".
OREX is manufactured from a variety of organic, degradable polymers
that have been modified to dissolve or degrade only in hot water. The basic
compound used to manufacture OREX Degradables woven and non-woven products is a
polymer known as polyvinyl alcohol ("PVA"), a safe material widely used in a
variety of consumer products such as eye drops, cosmetics and cold capsules. The
Company more recently has begun to develop the use of other polymers to test
manufacture OREX Degradables film and thermoformed and extruded products.
Through a manufacturing process developed by the Company, these polymers are
modified so they will dissolve or degrade only in hot water. See "Risk Factors -
Manufacturing and Supply Risks". Unlike traditional disposable products that
must be disposed of through either incineration or landfill, OREX Degradables
may be disposed of at the Point-of-Generation through the municipal sewer system
by dissolving or degrading them in hot water in an OREX Processor. An OREX
Processor is a standard commercial washing machine specially adapted primarily
by upgrading its water heater and removing the spin cycle. While a number of
suppliers exist for such washing machines, the Company has entered into
arrangements with washing machine distributors for the supply of OREX Processors
at a retail cost of approximately $2,000 for a low capacity unit, approximately
$8,500 for a mid-capacity unit and approximately $20,000 for a large capacity
unit. Disposal in this manner reduces the need for storage, handling and
off-site transportation of waste, reduces the potential for cross-infection,
reduces the total volume of solid waste and facilitates regulatory compliance.
An industry standard method for disposal of blood, with or without infectious
disease contamination, is through the municipal sewer system. While the Company
makes no claims or representations in its product advertising or labeling that
the disposal method for OREX Degradables renders the disposal matter
non-infectious, independent test results indicate that dissolving OREX
Degradables in hot water inactivates in excess of 99% of tested microorganisms.
Disposal in this manner is not subject to federal regulation but may be
regulated by state and local sewage treatment plants to the extent that sewer
discharges from hospitals or other facilities may interfere with the proper
functioning of such plants. Based on product testing and available research, the
Company believes that OREX Degradables manufactured from PVA will not interfere
with the proper functioning of sewage treatment plants. Based on such testing
and research, the Company has obtained over 100 written and verbal non-binding
concurrences and is in the process of seeking additional non-binding
concurrences with the Company's conclusions from local authorities. While the
Company is undertaking evaluation of OREX Degradables manufactured from polymers
other than PVA, no assurances can be provided that such non-PVA based OREX will
not interfere with the proper functioning of sewage treatment plants. See "-
Government Regulation" and "Risk Factors - Regulatory Risks".
The Company has not been satisfied with its performance to date in
manufacturing and selling OREX Degradables. In particular, the Company has
failed to achieve profitable margins on sales of OREX degradable products to
date. Accordingly, the Company has engaged in a program to improve its operating
results by reducing its marketing efforts directed towards the sale of OREX
Degradables, divesting itself of underperforming assets, reducing the amount of
its debt, and forming a business unit called OREX Technologies International
("OTI") to provide increased focus on OREX commercial development. See "Risk
Factors - Limited Operating History; Net Losses", "- Risks of New Products" and
"-Manufacturing and Supply Risks".
The Company, through OTI, has developed a spunlaced OREX Degradables
fabric which is neither chemically nor thermally bonded and therefore remains
softer, more flexible and cooler than previously available OREX products. The
Company plans to introduce this product line under the brand Enviroguard(TM) on
a staged basis beginning during the second quarter of 1999. OTI continues to
work to develop and validate other applications for the OREX technology. See
"Risk Factors - Risks of New Products".
Infection Control Products
In 1998 the Company formed a business unit called the Infection Control
Group which consists primarily of the equipment drape and fluid control products
manufactured by the Company's subsidiary, Microtek Medical, Inc. ("Microtek"),
and the Company's safety products.
The Company acquired Microtek in a pooling of interests transaction as
of September 1, 1996, and the Company's financial statements prior to the
acquisition date have accordingly been restated to include Microtrek's financial
statements. Through Microtek, the Company manufactures and markets equipment
drapes and fluid control products. Microtek is a Delaware corporation which,
prior to the Microtek acquisition, operated independently following its spin-off
from Teknamed Corporation, a medical products company, in 1984.
Microtek designs, manufactures and markets two principal product lines
for use in niche markets of the health care industry. First, Microtek's
infection control products consist of more than 1,500 specially designed drapes
for use in draping operating room equipment during surgical procedures. This
equipment includes, for example, microscopes, ultrasound probes, endoscopic
video cameras, x-ray cassettes, imaging equipment, lasers and handles attached
to surgical lights. In addition to reducing the risk of cross-infection, these
products increase operating room efficiency by reducing the need to sterilize
equipment between procedures. These disposable sterile products are generally
made from plastic film containing features designed for the operating room
environment, such as low glare and anti-static features. Microtek's second
principal product line, fluid-control products, are specially designed
disposable pouches which are attached to a surgical patient drape (called a
substrate), which is placed around the operative site. For instance, Microtek
manufactures a specialty pouch for knee arthroscopy. This pouch captures not
only the bodily fluids that are discharged from the knee but also the sterile
saline that is infused into the operative site during the arthroscopic
procedure. Microtek's fluid control product line primarily consists of more than
200 different plastic disposable collection pouches.
For 1996, 1997 and 1998, sales of Microtek products accounted for
approximately 24%, 27% and 33% of the Company's total revenues, respectively.
Included in such sales figures are $7.9 million, $8.5 million and $8.6 million
of export sales by Microtek during 1996, 1997 and 1998, respectively.
The Company offers several other lines of safety products for the
management of potentially infectious and hazardous waste. The leading safety
products are described below.
Liquid Treatment System (LTS) is a super-absorbent powder which
converts potentially infectious liquid waste into a solid waste suitable for
landfill disposal, subject to applicable regulatory requirements. LTS is
typically added to a suction canister or other fluid collection device in which
blood or other body and irrigation fluids are collected during surgery or in
wound drainage after surgery. LTS converts liquid waste into a solid waste,
thereby facilitating handling, transportation and disposal. Regardless of
whether LTS is disposed of in landfills or through incineration or other special
process, LTS provides advantageous occupational safety benefits by
Point-of-Generation treatment of potentially infectious liquid waste. See "-
Government Regulation".
Sharps Management System (SMS) is designed to encapsulate and
physically disinfect contaminated sharps (such as needles, syringes, scalpels,
etc.) at the Point-of-Generation. The product consists of a puncture- and
spill-resistant plastic container partially filled with a bathing solution for
encapsulation. When full, a small amount of catalyst powder is added. The
catalyst creates a chemical reaction which heats the container and solidifies
the contents, thus encapsulating the sharps and reducing the risk of accidental
punctures. The container of SMS treated sharps is suitable for handling,
transportation and disposal.
During 1998 the Company sold its mobile waste treatment business
operated by SafeWaste, a wholly owned subsidiary of the Company.
The Company also manufactures and markets various other products. In
April, 1996, Microtek purchased the Venodyne division of Advanced Instruments,
Inc. which manufactures and markets pneumatic pumps and disposable compression
sleeves for use in reducing deep vein thrombosis. Sales of these products have
not been material to the Company's results of operations.
Product Packaging (Procedure Trays)
In 1998 the Company formed a business unit called Product Packaging
which consists principally of its procedure tray products. Procedure trays are
sterilized packs which include all components (traditionally conventional
disposable or reusable medical products such as, for example, laparotomy
sponges, drapes and suction tubing) used in medical (primarily surgical)
procedures. Custom and standard procedure trays can be utilized in a wide range
of procedures, such as cardiovascular surgery and angiography, orthopedic
surgery, laparoscopic and endoscopic procedures and Caesarian-sections. Custom
trays are assembled according to the specific requirements of the hospital end
user. Isolyser entered the procedure tray market with the acquisition (the
"Atkins Acquisition") of Charles Atkins and Company, Ltd. ("Atkins") on February
28, 1993, and currently conducts its procedure tray business through its
subsidiary MedSurg Industries, Inc. ("MedSurg"), which it acquired (the "MedSurg
Acquisition") on December 31, 1993. For 1996, 1997 and 1998, sales of procedure
trays and related products accounted for approximately 34%, 37% and 40% of the
Company's total revenue, respectively. The Company made the Atkins and MedSurg
acquisitions because it believes there are synergies between OREX Degradables
and procedure trays, namely (i) the tray business serves as a distribution
channel for OREX Degradables and (ii) OREX Degradables differentiate the
Company's procedure trays from those of its competitors. Moreover, the Company's
sales persons marketing procedure trays are uniquely situated to market OREX
Degradables because of their direct relationship with hospital operating room
personnel who are important to the decision-making process in purchasing OREX
Degradables and such sales persons' knowledge about regulatory and environmental
benefits and issues related to OREX Degradables.
White Knight
The Company acquired White Knight as of September 1, 1995. Through
White Knight, the Company manufactures and markets non-woven infection control
products and protective apparel for use primarily in the health care industry.
As an outgrowth of a business founded in the 1950s and evolved over a series of
mergers, acquisitions and restructurings, White Knight pioneered the disposable
medical products market in the early 1970s, and is today a manufacturer and
converter (in competition with other larger companies such as Allegiance
Corporation ("Allegiance")) of non-woven sterile and non-sterile products. White
Knight is a Pennsylvania corporation formed in 1991 to acquire substantially all
of the assets of the White Knight Health Care division of Work Wear Corporation,
Inc., which at the time was a debtor-in-possession under Chapter 11 of the
Bankruptcy Code of 1978, as amended.
During portions of 1998 White Knight's principal products and related
markets could be categorized into two overlapping groups. The first and largest,
called the medical products division, is still operated by White Knight and
manufactures non-woven disposable surgical apparel, drapes and accessory
products (including drapes, gowns, shoe covers, masks and caps) for use in
hospitals and surgical centers. The second product group and related market,
called the specialty apparel division, manufactures disposable and reusable
apparel (such as coveralls, lab coats, frocks, hoods, foot coverings, masks,
caps and isolation gowns) which are in part an extension of White Knight's
medical products and which are marketed for use in clean room environments,
laboratories and other industrial applications (including clean rooms for
pharmaceutical, electronic and biotech industries as well as automotive and
paint industries). A portion of this latter product group (not including White
Knight's Precept(R) brand) was sold in 1998. The Company has announced plans to
sell its remaining businesses operated through its White Knight subsidiary. See
"Risk Factors - Risks of Planned Divestitures."
Net sales of White Knight in 1996, 1997 and 1998 represented 35%, 30%
and 25%, respectively, of the Company's total revenue. Included in such sales
figures are $4.5 million, $3.3 million and $2.5 million of export sales by White
Knight during 1996, 1997 and 1998, respectively.
Marketing and Distribution
Substantially all of the Company's sales in 1998 were made to the
health care market. Hospitals purchase most of their products from a few large
distributors, many of which provide inventory control services to their
customers. The Company believes that a key to penetrating the health care market
is a strong sales force capable of educating distributors and end users about
the unique characteristics of its products so that distributors will recommend
and end users will request the Company's products. Achieving market penetration
of the Company's products is subject to a number of risks. See "Risk Factors -
Risks of New Products".
As a part of a restructuring plan implemented during 1997 and 1998, the
Company substantially reduced its sales force. As of December 31, 1998, the
Company's marketing and sales force consisted of 20 sales representatives, 50
field sales managers, nine home office sales manager, nine marketing managers
and 31 persons in customer support. The sales force has been divided into two
groups which operate independently, one working for the Company's Infection
Control Group and the other working for the Company's Product Packaging
Division. The Company is dependent upon a few large distributors for the
distribution of its products. The Company's top three customers accounted for
approximately 33% of the Company's total revenues during 1998. Of these
customers, only Owens & Minor, Inc. accounted for over 10% of the Company's
total sales during 1998. Because distribution of medical products is heavily
dependent upon large distributors, the Company anticipates that it will remain
dependent upon these customers and others for the distribution of its products.
If the efforts of the Company's distributors prove unsuccessful, or if such
distributors abandon or limit their distribution of the Company's products, the
Company's sales may be materially adversely affected. See "Risk Factors -
Reliance Upon Distributors".
While the Company introduced OREX Degradables to the health care
industry on a limited basis in March, 1994, meaningful sales of OREX Degradables
did not commence until 1996. Over this time, the Company conducted field trials
of certain OREX Degradables products as a method to introduce this new
technology to the health care marketplace. During 1996, the Company continued to
conduct such field trials while concurrently including various OREX Degradables
products, as they became available, in procedure trays and by selling such
products on a stand-alone basis and in supplemental packs. As a result of
various factors including unprofitable sales of OREX, the Company substantially
reduced its marketing efforts for its OREX products during 1997. The Company
currently plans to introduce on a staged basis a new line of OREX products,
under the Enviroguard brand, beginning in the second quarter of 1999. See
"Products and Markets - OREX Degradables". There can be no assurance that OREX
Degradables will achieve or maintain substantial acceptance in their target
markets or that the Company will be successful in selling OREX Degradables at a
price providing satisfactory margins to the Company. See "Risk Factors - Risks
of New Products" and "- Manufacturing and Supply Risks".
The Company sells its procedure trays exclusively through independent
distributors with the marketing assistance of the Company's sales force. The
Company's other traditional medical products are sold through distributors and
custom procedure tray companies (including the Company's custom procedure tray
operations). The Company also markets certain of its products to other
manufacturers on a "non-branded" or private label basis. For example, the
Company's fluid control pouches are sold to manufacturers of substrates, and the
Company's equipment drapes are sold to manufacturers of the equipment for which
such drapes were designed.
Under an agreement entered into between White Knight and Sterile
Concepts, Sterile Concepts agreed to purchase a yearly minimum of $5.1 million
of products from White Knight until June 30, 1998. A portion of the purchase
price payable for these products paid by Sterile Concepts to White Knight is
used to amortize certain notes payable by White Knight to Sterile Concepts,
thereby providing certain trade discounts on product sales from White Knight to
Sterile Concepts. To the extent these notes are not entirely satisfied through
these trade discounts, the notes terminate at January 15, 2000 regardless of
whether there remains any unpaid principal or interest outstanding at that time.
In July, 1996, Sterile Concepts was acquired by Maxxim Medical, Inc. ("Maxxim"),
a vertically integrated manufacturer and marketer of medical products
competitive with those of the Company. While Sterile Concepts had historically
purchased more than its minimum purchase obligation from White Knight, beginning
in 1997, Sterile Concepts failed to fulfill its purchase obligations under its
underlying agreement with White Knight. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
The Company's total export sales during 1996, 1997 and 1998 were $12.4
million, $11.8 million and $11.1 million, respectively. Outside the United
States, the Company markets its products principally through a network of
approximately 80 different dealers and distributors. As of December 31, 1998,
the Company also had two sales representatives operating in international
markets, and maintains an office and warehouse distribution center near
Manchester, England and an office for one of its sales representatives and
support personnel in Luxembourg, Europe.
During a portion of 1998, as a part of its White Knight business, the
Company marketed various woven and non-woven apparel (such as coveralls, lab
coats, frocks, hoods, foot coverings, masks, caps, isolation gowns, headrests
and pillowcases) in industrial markets such as clean room environments,
laboratories, mass transportation industries and automotive industries. The
Company sold this business in August, 1998.
On March 1, 1992, Isolyser entered into a distribution agreement with
Allegiance, a leader in the sale of suction canisters and related apparatus. The
agreement expires February 28, 2000 and is subject to renewal for one-year terms
thereafter unless otherwise terminated. During 1996, the Company began to
distribute LTS through other national distributors. Beginning in November, 1997,
Allegiance substantially reduced its purchases of LTS products. The Company
believes that such reduction of purchases may be temporary and that many of the
Company's customers using LTS maintain a preference for such product over
competitors' products. Such cessation of purchases may be related to recent
regulatory developments affecting LTS. See "- Government Regulation", "Risk
Factors - Reliance Upon Distributors" and "- Regulatory Risks".
To further expand its marketing resources, the Company from time to
time seeks to enter into strategic alliances with third parties such as
specialty equipment manufacturers and other non-competitive companies which
would enable it to sell various of its products. While the Company from time to
time engages in such discussions, the Company provides no assurances that any
such strategic alliances will be consummated or, if consummated, that any such
alliance will be favorable to the Company.
Manufacturing and Supplies
OREX is manufactured from a variety of organic, degradable polymers
that have been modified to dissolve or degrade only in hot water. The basic
compound used to manufacture OREX Degradables woven and non-woven products is
PVA, a safe material widely used in a variety of consumer products such as eye
drops, cosmetics and cold capsules. The Company more recently has begun to
develop the use of other polymers to test manufacture OREX Degradables film and
thermoformed and extruded items. Through a manufacturing process developed by
the Company, the Company modifies these polymers so they will dissolve or
degrade only in hot water. The modified polymers can then be made into most
woven and non-woven fabrics, film, packaging and thermoformed and extruded
products. The Company currently obtains its PVA raw materials from various
foreign suppliers. Risks exist in obtaining the quality and quantity of PVA at a
price that will allow the Company to be competitive with manufacturers of
conventional disposable and reusable products. Prevailing prices of PVA have
adversely affected the Company's manufacturing costs for its OREX products. PVA
fiber is required to manufacture the Company's non-woven and woven OREX
Degradables, while PVA resin is the raw material required to manufacture OREX
Degradables utensils and film products and PVA fiber. PVA resin from Japan,
Taiwan and certain producers in China are subject to anti-dumping duties if
imported into the United States. See "Risk Factors - Manufacturing and Supply
Risks".
Until 1997, the Company had followed a strategy of capital equipment
purchases and acquisitions to expand and vertically integrate the Company's
manufacturing capabilities, thereby enabling the Company to manufacture and
convert into finished goods many OREX Degradables internally. The Company
acquired OREX Degradables material manufacturing plants as a part of this
expansion strategy. The manufacturing capacity at the Company's OREX materials
manufacturing plants significantly exceeded product demand, which caused the
Company to incur overhead costs which were not absorbed in the cost of product
sales. The Company sold these manufacturing facilities in 1998 to a corporation
in which the Company retained a 19.5% continuing ownership interest. Over the
past year, the Company has also begun sourcing OREX fabric using hydroentangled
manufacturing processes to manufacture a spunlaced fabric which is neither
chemically nor thermally bonded. Through these manufacturing efforts, both
domestic and abroad, the Company seeks to reduce the cost of producing OREX
drapes and gowns while simultaneously improving the quality of these products.
See "Risk Factors - Manufacturing and Supply Risks".
In 1998, in connection with the sale by the Company of its OREX
materials manufacturing plants which were used by the Company to convert PVA
fiber into OREX nonwoven roll goods and towels, the Company sold 4.5 million
pounds of excess PVA fiber at a price of $.45 per pound under an agreement
pursuant to which the Company agreed to repurchase 2.6 million pounds of such
fiber (either as fiber or converted goods) over a four year period at a cost of
$.80 per pound of fiber. During 1998, the Company paid $223,000 for such fiber.
See "Risk Factors - Manufacturing and Supply Risks".
The Company uses various domestic and foreign independent manufacturers
for some OREX Degradables products for assembling, packaging, sterilizing and
shipping by the Company. The Company uses contractors in the People's Republic
of China to manufacture OREX Degradables sponge products and spunlaced OREX
Degradables fabric. The Company has used various independent parties (both
domestically and internationally) to manufacture various OREX Degradables
thermoformed and extruded products and composite products which have not yet
been offered for commercial sale by the Company. The Company's requirements
(which to date have been modest) for OREX Degradables film products are
currently being supplied by a contract manufacturer. The Company has not yet
successfully reduced the cost of manufacturing OREX thermoformed and extruded
products and OREX film products to a sufficient degree to offer such products
commercially. See "Risk Factors - Manufacturing and Supply Risks".
The Company manufactures its equipment drapes and fluid control
products at its facilities in Columbus, Mississippi, the Dominican Republic and
Empalme, Mexico. The Company utilizes a facility in Jacksonville, Florida as a
distribution point for receipt and shipment of product and for light
manufacturing.
The Company currently relies upon independent manufacturers for the
purchase of materials and components for most of its safety products. The
Company uses, and expects to continue to use, vendors of stock items to the
extent possible to control direct material costs for its safety products. The
Company's safety products production facilities located in Norcross, Georgia and
Columbus, Mississippi are used for mixing liquid and powdered chemicals, other
light manufacturing and packaging. The packaging portion of these operations was
relocated to Columbus, Mississippi in 1998.
The Company currently purchases components for procedure trays from a
large number of independent vendors, and assembles custom and standard procedure
trays for use in a wide array of medical procedures, including orthopedic,
ophthalmic, cardiovascular, laparoscopic, obstetric-gynecologic and endoscopic
procedures. The Company's Virginia-based procedure tray manufacturing operation
is separated into four stages: (i) receiving and stocking components for
procedure trays, (ii) assembling trays from these components, (iii) sterilizing
and quarantining and (iv) shipping. Generally, custom trays can be shipped to
customers within approximately 60 days from the date an order is placed.
The Company conducts its non-woven conversion manufacturing operations
in two locations: (i) a 90,000 square foot facility under a long-term lease in
Douglas, Arizona which manufactures medical products and specialty apparel; and
(ii) a 90,000 square foot owned facility in Agua Prieta, Mexico located adjacent
to the Douglas facility to provide labor intensive post-cutting applications. In
1998, as a part of the Company's sale of the industrial division of White
Knight, the Company sold a 50,000 square foot facility located in Childersburg,
Alabama, which manufactured medical and specialty apparel products, including
face masks. As a part of such sale, White Knight agreed to purchase a certain
minimum amount of face mask products manufactured at the Childersburg facility
until August 2002. Also during 1998, the Company sold a 60,000 square foot
facility in Runnemede, New Jersey which previously manufactured products for the
semi-autonomous Struble & Moffitt division of White Knight. The operations of
this division were terminated in 1997 through consolidations and divestitures of
certain small, independent product lines. Through White Knight, the Company also
maintains contracted manufacturing operations in Texas and the People's Republic
of China. Raw materials for White Knight products are purchased from numerous
vendors. White Knight's relationships with vendors are good, although White
Knight maintains no long-term supply contracts with vendors. Certain medical and
specialty apparel products are impacted by user preference in fabric choice.
White Knight, along with other larger competitors, has access to a full
complement of fabric selections from vendors of choice, although not in all
cases with the same pricing discounts available to larger purchasers.
Order Backlog
At December 31, 1998, the Company's order backlog totaled approximately
$2.0 million compared to approximately $5.9 million (in each case net of any
cancellations) at December 31, 1997. All backlog orders at December 31, 1998 are
expected to be filled prior to year end 1999.
Technology and Intellectual Property
The Company seeks to protect its technology by, among other means,
obtaining patents and filing patent applications for technology and products
that it considers important to its business. The Company also relies upon trade
secrets, technical know-how and innovation and market penetration to develop and
maintain its competitive position.
The Company holds several patents issued by the U.S. Patent and
Trademark Office concerning methods of disposing of OREX Degradables, including:
(1) US Patent 5,207,837, which was issued in 1993 and successfully reexamined by
the U.S. Patent Office in 1996, which covers a method of disposing OREX
Degradables that are configured into a drape, towel, cover, overwrap, gown, head
cover, face mask, shoe covering, sponge, dressing, tape, underpad, diaper, wash
cloth, sheet, pillow cover, or napkin; (2) US Patent 5,181,967, which was issued
in 1993, and which covers a method of disposing particular OREX Degradables
utensils such as procedure trays, laboratory ware, and patient care items; and
(3) US Patent 5,181,966, which was issued in 1993 and successfully reexamined in
1996, and which covers a method of disposing OREX Degradables configured into
packaging materials.
Isolyser also has several patents which cover particular OREX
Degradable products, including (1)US Patent 5,650,219, which was issued in 1995
and covers a method of disposing particular OREX Degradables configured into
garments, linens, drapes, and towels; (2) US Patent 5,620,786, which was issued
in 1997 and covers particular OREX Degradables that are configured into towels,
sponges, or gauze; (3) US Patent 5,268,222, which was issued in 1993 and covers
a composite fabric made with an OREX Degradable; (4) US Patent 5,885,907, which
was issued on March 23, 1999, and covers particular OREX Degradables configured
into a towel, sponge, or gauze; and (5) US Patents 5,470,653 and 5,707,731,
issued in 1995 and 1998, and which cover mop heads made from OREX Degradables.
Isolyser also has patents that cover methods of producing OREX
Degradables, including: (1) US Patent 5,871,679, issued February 16, 1999, and
which covers methods for producing OREX Degradables that are configured into
thermoplastic films and fabrics; and (2) US Patent 5,661,217, issued in 1997,
which covers a method of forming molded packaging and utensils from OREX
Degradables, and methods of forming OREX Degradables films into a packaging,
drape, cover, overwrap, gown, head cover, face mask, shoe cover, CSR wrap, tape,
underpad or diaper.
The Company also has several issued patents related to its SMS and LTS
technologies.
The Company currently has several applications pending before the U.S.
Patent and Trademark Office which relate to OREX Degradables. Specifically,
those applications concern (i) a new class of OREX biodegradable polymers, (ii)
methods for enhancing the absorbency and hand feel of OREX Degradables fabrics,
(iii) finishing formulations for OREX Degradables, (iv) a pipeliner manufactured
with OREX Degradables, (v) medical containers made from OREX Degradables, and
(vi) a method of absorbing oil with OREX Degradables fabric. The Company is not
aware of any facts at this time that would indicate that patents sought by these
applications will not be issued; however, no assurances can be provided that
patents will issue from these applications. See "Risk Factors Protection of
Technologies."
The Company's U.S. patents expire between 2001 and 2016. The Company
files for foreign counterpart patents on those patents and patent applications
which the Company considers to be material to its business. No assurance can be
given that the various components of the Company's technology protection
arrangements utilized by the Company to protect its technologies, including its
patents, will be successful in preventing others from making products
competitive with those offered by the Company, including OREX Degradables. See
"Risk Factors Protection of Technologies".
Under a five-year license agreement from Microban Products Company
entered into on March 22, 1996, Microtek acquired the exclusive right to
incorporate certain antimicrobial additives in the Company's surgical and
equipment drapes manufactured with film and nonexclusive rights to such
additives in non-woven drape products, subject to the payment of royalties and
certain other terms and conditions specified in the license agreement. To date,
such license has not been material to the Company's operations.
The Company has registered as trademarks with the U.S. Patent and
Trademark Office "Isolyser," "OREX", "LTS" and "SMS". In addition, the Company
is applying to register the trademark "Enviroguard" in the U.S. Patent and
Trademark Office. Trademark registrations for "Isolyser", "OREX" and "LTS" have
also been granted in various foreign countries. White Knight currently maintains
registrations with the U.S. Patent and Trademark Offices for the trademarks
"White Knight" and "Precept". Microtek maintains registrations of various
trademarks which the Company believes are recognized within their principal
markets.
Competition
The markets in which the Company competes are characterized by
competition on the basis of quality, price, product design and function,
environmental impact, distribution arrangements, service and convenience. Many
of the Company's competitors have significantly greater resources than the
Company. See "Risk Factors Competition".
Although the Company is not aware of any products currently available
in the market place which provide the same disposal and degradable benefits as
OREX Degradables, OREX Degradables compete with traditional disposable and
reusable products currently marketed and sold by many companies. Single use
disposable (as opposed to reusable) drapes and gowns have been available for
over 25 years and according to a 1992 market study account for over 80% of the
surgical market. Competing manufacturers of traditional disposable medical
products are large companies with significantly greater resources than those of
the Company. These competitors have in many instances followed strategies of
aggressively marketing products competitive with OREX Degradables to buying
groups resulting in increasing cost pressures. These factors have adversely
affected the Company's ability to adjust its prices for its OREX products to
take into account disposal cost savings provided by these products, and have
adversely affected the Company's ability to successfully penetrate potential
customer accounts. See "Risk Factors - Risks of New Products" and "-
Competition".
The market for procedure tray products is highly competitive. Based on
publicly available information, the Company believes that the procedure tray
market is dominated by three companies, who combined have more than 85% of the
United States market thus far converted to using procedure trays.
The market for the Company's traditional medical and specialty apparel
products is also highly competitive, and is dominated by a few large companies
such as Allegiance, Kimberly-Clark Corporation, Johnson & Johnson and 3M
Corporation.
Competition for the Company's safety products includes conventional
methods of handling and disposing of medical waste. Contract waste handlers are
competitors which charge premium rates to remove potentially infectious and
hazardous waste and transport it to an incineration or autoclaving site. Many
hospitals utilize their own incinerators to dispose of this waste. In addition,
systems are available that hospitals can purchase for grinding and chemically
disinfecting medical waste at a central location.
The Company believes that its LTS products command a dominant share of
a market that thus far has been marginally penetrated. However, the Company is
aware of a variety of absorber products that are directly competitive with LTS.
Recent regulatory developments have placed LTS at a competitive disadvantage to
a competitor's absorber product. See "- Government Regulation". The Company
estimates that it has only a small (less than 5%) market share for its SMS
products. The market niche for disposal of sharps is dominated by a number of
other companies.
Government Regulation
The Company is subject to a number of federal, state and local
regulatory requirements which govern the marketing of the Company's products and
the use, treatment and disposal of these products utilized in the patient care
process. In addition, various foreign countries in which the Company's products
are currently being distributed or may be distributed in the future impose
regulatory requirements. See "Risk Factors - Regulatory Risks".
The Company's traditional medical products (including, for example,
drapes, gowns and procedure trays), OREX Degradables line of products and SMS
products are regulated by the FDA under medical device and drug provisions of
the Federal Food, Drug and Cosmetic Act (the "FDCA"). FDA regulations classify
medical devices into one of three classes, each involving an increasing degree
of regulatory control from Class I through Class III products. Medical devices
in these categories are subject to regulations which require, among other
things, pre-market notifications or approvals, and adherence to good
manufacturing practices, labeling, record-keeping and registration requirements.
Patient care devices which the Company currently markets are classified as Class
I or Class II devices subject to existing 510(k) clearances which the Company
believes satisfy FDA pre-market notification requirements. The FDA has issued to
the Company 510(k) clearances on OREX Degradables products for surgical sponges,
operating room towels, drapes, gowns, surgeon's caps, surgeon's vests, shoe
covers and medical bedding. The Company is currently developing, evaluating and
testing certain OREX Degradables film and thermoformed or extruded OREX products
manufactured from non-PVA polymers, and it is possible that new 510(k)
clearances will be required for such products. There can be no assurances as to
when, or if, other such 510(k) clearances necessary for the Company to market
products developed by it in the future will be issued by the FDA. The
pharmaceutical products marketed by the Company as components of certain
procedure trays are subject to labeling, current good manufacturing practices
and other general requirements for drugs under the FDCA, but because these
products are produced by other entities, the Company does not have any
independent responsibility for any premarket approvals required for these drug
products. The FDA inspects medical device manufacturers and distributors, and
has broad authority to order recalls of medical devices, issue stop sale orders,
seize non-complying medical devices, enjoin violations, impose civil and
criminal penalties and criminally prosecute violators. The FDA possesses similar
broad inspection and enforcement authority over pharmaceutical products.
The FDA also requires health care companies to satisfy record-keeping
requirements and the quality system regulation (QSR) which require that
manufacturers have a quality system for the design and production of medical
devices intended for commercial distribution in the United States. Failure to
comply with applicable regulatory requirements, which may be ambiguous or
unclear, can result in fines, civil and criminal penalties, stop sale orders,
loss or denial of approvals and recalls or seizures of products.
Countries in the European Union require that products being sold within
their jurisdictions obtain a CE mark. The Company has CE mark approval to sell
of its safety products in Europe. One of the conditions to obtaining CE mark
status involves the qualification of the Company's manufacturing plants under
certain certification processes. All of the Company's manufacturing plants have
obtained such certifications. To maintain CE mark approval, the Company has to
satisfy continuing obligations including annual inspections by European notified
bodies as well as satisfy record keeping and other quality assurance
requirements. The notified bodies have the authority to stop the Company's use
of the CE mark if the Company fails to meet these standards. While the Company
believes that its operations at these facilities are in compliance with
requirements to maintain CE mark status, no assurances are provided that such
certifications will be maintained or that other foreign regulatory requirements
will not adversely affect the Company's marketing efforts in foreign
jurisdictions.
Under the Federal Insecticide, Fungicide, and Rodenticide Act
("FIFRA"), any product which claims to kill microorganisms through chemical
action must be registered with the EPA. Any product that makes a claim that it
kills microorganisms exclusively via a physical or mechanical means is regulated
as a physical "device" under FIFRA. Pesticide devices do not require EPA
registration, but are subject to some requirements, including labeling and
record keeping. FIFRA affects primarily the Company's LTS and SMS products. The
Company believes its SMS product qualifies as a physical disinfecting device
under FIFRA, which permits the Company to advertise that such product physically
disinfects microorganisms without EPA registration. LTS is not registered with
the EPA. The Company has marketed LTS in a manner in which the Company believed
complied with FIFRA by not making claims in product labeling or marketing that
LTS treats or disinfects medical waste or kills microorganisms. In 1998 the EPA
announced its position that FIFRA requires that products, such as LTS, which
hold state approvals related to anti-microbial efficacy, such as state approval
for landfill of LTS-treated waste, impliedly make claims about killing
microorganisms which necessitate registration under FIFRA. The Company continues
to sell its LTS products without FIFRA registration, and has met with the EPA
concerning its continuing sale of LTS products and methods to obtain expedited
registration of a new version of LTS under FIFRA. The Company has altered its
marketing of LTS to comply with EPA's new guidance. The Company believes that it
will obtain registration under FIFRA of such new version of LTS; however, no
assurances can be provided that the Company will obtain such registration or
that prior or continuing sales of the Company's LTS products may not either be
stopped or subject the Company to penalties or other regulatory action. A
product line marketed by a competitor of the Company's LTS products has been
registered under FIFRA, placing LTS at a competitive disadvantage to such
competing product line. See "Risk Factors - Regulatory Risks" and "- Reliance
Upon Distributors".
State and local regulations of the Company's products and services is
highly variable. In certain cases, for example, state or local authorizations
are required to landfill Isolyser's SMS or LTS products, or both. In November,
1997, as a result of a review of an existing approval in California for the
landfilling in California of waste treated by LTS, California authorities
revoked such approval. While LTS offers benefits unrelated to landfilling, such
action has adversely affected the Company's ability to sell LTS. The Company is
in the process of obtaining from the state of California approval to landfill
waste treated by a new version of LTS. Certain other states are also reviewing
previously issued approvals to landfill LTS-treated waste within such other
states, but no action has yet been taken as a result of such review processes.
No assurances can be provided that prior regulatory actions or pending
regulatory reviews will not continue to have an adverse effect upon the sales of
the Company's liquid absorbent products. See "Risk Factors - Reliance Upon
Distributors" and "Regulatory Risks".
State and local sewage treatment plants regulate the sewer discharge,
such as dissolved OREX Degradables, from commercial facilities to the extent
that such discharges may interfere with the proper functioning of sewage
treatment plants. Based on product testing and available research the Company
believes that OREX Degradables manufactured from PVA will not interfere with the
proper functioning of sewage treatment plants. The Company has obtained from
state and local authorities over 100 written and verbal non-binding concurrences
with the Company's conclusions and continues to pursue additional non-binding
concurrences. While the process of obtaining such concurrences is time consuming
and expensive due to the significant number of such authorities and the
educational and testing processes involved, the Company does not believe that
regulations governing sewage and waste water discharges will prevent the use of
OREX Degradables. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX Degradables will not interfere with the
proper functioning of sewage treatment plants.
Regulators at the federal, state and local level have imposed, are
currently considering and are expected to continue to impose regulations on
medical and other waste. No prediction can be made of the potential effect of
any such future regulations, and there can be no assurance that future
legislation or regulations will not increase the costs of the Company's products
or prohibit the sale or use of the Company's products, in either event having an
adverse effect on the Company's business.
Employees
As of December 31, 1998, the Company employed approximately 1,655
full-time employees and approximately 15 people as independent contractor sales
representatives. Of these employees, 92 were employed in marketing, sales and
customer support, 1,400 in manufacturing, 17 in research and development, and
133 in administrative positions. The Company believes its relationship with its
employees is good. Approximately 13 of White Knight's employees located at the
Douglas plant were members of and represented by the United Food and Commercial
Workers Union, AFL-CIO. In addition, approximately 257 of White Knight's
employees located at White Knight's Agua Prieta, Mexico plant are represented by
a Mexican labor union.
Insurance
The Company maintains commercial general liability protection insurance
which provides coverage with respect to product liability claims of up to $12
million per occurrence with a $12 million aggregate limit. The manufacture and
sale of the Company's products entail an inherent risk of liability. The Company
believes that its insurance is adequate in amount and coverage. There can be no
assurance that any future claims will not exceed applicable insurance coverage.
Furthermore, no assurance can be given that such liability insurance will be
available at a reasonable cost or that the Company will be able to maintain
adequate levels of liability insurance in the future. In the event that claims
in excess of these coverage amounts are incurred, they could have a material
adverse effect on the financial condition or results of operations of the
Company.
Environmental Matters
The Company is not a party to any material environmental regulation
proceedings alleging that the Company has unlawfully discharged materials into
the environment. The Company does not anticipate the need for any material
capital expenditures for environmental control facilities during the next 18 to
24 months.
Risk Factors
Limited Operating History; Net Losses. Isolyser was incorporated in
1987 and commenced operations in 1988. Its principal products have been
available in the marketplace for a limited period of time. The Company began to
commercially introduce OREX Degradables in 1995 and total net sales of OREX
Degradables in 1998 approximated $4.7 million but did not provide any gross
profits. Sales of OREX Degradables in 1998 were substantially less than
comparable sales in 1997. The Company has not aggressively marketed such
products because the sale of such products has not been profitable. The Company
believes that the absence of gross profits on sales of OREX Degradables to date
is due to a combination of factors including but not limited to the cost of
manufacturing OREX Degradables products coupled with pricing of OREX Degradables
products at an amount which does not take into account disposal cost savings
provided by such products. The Company has sought to reduce its cost of
manufacturing its OREX products before developing a new marketing strategy for
such products. For the year ended December 31, 1998 the Company incurred actual
net losses of approximately $18.2 million, including $9.4 million of impairment
and other charges. No assurances can be given that the Company will operate
profitably in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Risks of New Products. The Company's future performance will depend to
a substantial degree upon market acceptance of and the Company's ability to
successfully and profitably manufacture, market, deliver and expand its OREX
Degradables line of products. The Company's total sales of OREX Degradables to
date has not been a significant component of the Company's total sales of all of
its products, while the Company's expenses (which in significant part reflects
the Company's investment in the potential for increased sales of OREX
Degradables products) associated with these products have adversely affected
operating results. See "- Limited Operating History; Net Losses".
The extent and rate at which market acceptance and penetration of the
Company's existing and future products are achieved is a function of many
variables including, but not limited to, product availability, product
selection, price, product performance and reliability, effectiveness of
marketing and sales efforts and ability to meet delivery schedules, as well as
general economic conditions affecting purchasing patterns. Long-term supply
contracts entered into by large hospital chains and smaller collective buying
groups may prohibit the Company from successfully marketing OREX Degradables to
such customers. The leading manufacturers of traditional disposable medical
products are large companies with significantly greater resources than those of
the Company. Those competitors have in many instances followed strategies of
aggressively marketing products competitive with OREX Degradables to buying
groups resulting in pricing pressures for such products. In addition, pressures
to reduce disposal costs of infectious waste have not materialized to the degree
originally anticipated. These and other factors have adversely affected the
Company's ability to adjust its price for OREX products to take into account
disposal cost savings provided by these products and have adversely affected the
Company's ability to successfully penetrate potential customer accounts. As the
Company currently has commercially available only a limited number of OREX
Degradables products and therefore cannot currently replace all traditional
disposable medical products with OREX Degradables products, potential customers
for the Company's products may not yet justify large-scale conversion to OREX
Degradables products. From time to time as the Company has introduced new OREX
Degradables products, the Company has encountered concerns with certain product
performance characteristics of those products. For example, the Company has not
been satisfied with the absorbency of its OREX Degradable towels and certain
aesthetic and user oriented product performance characteristics of the film
component of its OREX Degradables reinforced gowns. Unsatisfactory performance
to date of OREX products in the market place could adversely affect the
Company's introduction of new OREX products. Since 1997, the Company has
substantially reduced its marketing efforts related to its OREX Degradables
products, substantially reduced its manufacturing of such products, recorded
significant nonrecurring charges related to its OREX business, and sold various
of its facilities formerly used by the Company to internally manufacture OREX
Degradables products. See "Business - Business Strategy" and "- Products and
Markets".
The Company has not been successful to date in its efforts to obtain
substantial acceptance of its OREX Degradables products in their target markets.
There can be no assurance that the Company's products will achieve or maintain
substantial acceptance in their target markets. In addition to market
acceptance, various factors, including delays in improvements to and new product
development and commercialization, delays in expansion of manufacturing
capability, new product introductions by competitors, price, competition, delays
in regulatory clearances and delays in expansion of sales and distribution
channels could materially adversely affect the Company's operations and
profitability. See "Business - Products and Markets", "- Marketing and
Distribution", and "- Manufacturing and Supplies", and "Risk Factors -
Manufacturing and Supply Risks".
Risks of Planned Divestitures. The Company has announced its plans to
seek to dispose of its remaining businesses operated through its White Knight
subsidiary. While the Company has engaged in negotiations to complete such
divestiture, the Company does not have under contract any such divestiture.
Meanwhile, White Knight has been operating at a loss. The Company may not be
successful in selling such business or may not be able to sell such business at
an acceptable price. If the Company either elects not to or is unable to sell
such business, the Company will need to develop and implement a new operating
plan to improve the operating results of such business. Such new operating plan
could require the Company to incur charges to its financial statements to
restructure its operations, adversely affecting operating results. Also, the
Company may be required or may elect to seek to dispose of other assets to
improve its liquidity and its operating results. If the Company disposes of
assets at an amount less than the amount at which such assets are currently
recorded on the Company's financial statements, the Company would be required to
record additional charges to such financial statements, adversely affecting its
operating results. If the Company sells its remaining White Knight business, the
Company will forego its ability to internally convert OREX Degradables nonwoven
products into finished goods for commercial sale, requiring that the Company
locate alternative conversion manufacturing services. If the Company disposes of
other assets, the Company may be required to outsource services previously
provided within the Company. See "- Manufacturing and Supply Risks" and "-
Liquidity Risks".
Manufacturing and Supply Risks. Due to low sales rates for the
Company's OREX Degradables products, the Company's manufacturing capacities
available for the production of OREX goods have significantly exceeded the
Company's requirements for such products. While the Company has disposed of many
of its former assets having such excess capacity, the Company's White Knight
subsidiary continues to have excess capacity which adversely affects the
Company's operating results. See "- Risks of Planned Divestitures". The Company
has entered into contracts requiring that it purchase certain minimum quantities
of PVA fiber raw material which the Company uses for the manufacture of OREX
fabrics. In addition, the Company has entered into a contract for the
manufacture of OREX fabrics. See "Business - Manufacturing and Supplies". The
inability of the Company to increase the sales rates of the Company's OREX
Degradables products, including its planned Enviroguard product line, could
adversely affect the ability of the Company to satisfy its obligations under
these contracts, thereby adversely affecting the Company's operating results.
The Company's divestiture of certain of its assets which formerly
provided internal manufacturing capabilities for the production of OREX goods
has increased the Company's dependence upon independent manufacturers to satisfy
its requirements for the production of OREX products. The Company's existing
inventories of OREX non-woven roll goods and finished products and OREX towels
mitigate immediate risks associated with dependence upon such third party
suppliers. The Company has also sought to reduce such risks by maintaining a
minority ownership position in the company which operates the manufacturing
facilities previously owned by the Company for the production of OREX non-woven
roll goods and OREX towels. The Company has entered into a contract with the
owner of such manufacturing facilities for the continuing supply of OREX
non-woven roll goods, but has not yet concluded a contract for the continuing
supply of OREX towels. The Company's new Enviroguard product line for spunlaced
OREX fabrics is dependent upon supply sources based in China. The Company has
negotiated a short-term contract for the continued supply of such spunlaced
fabrics with one supplier located in China. Production in China and elsewhere
outside the United States exposes the Company to risks of currency fluctuations,
political instability and other risks inherent in manufacturing in foreign
countries. Certain textiles and similar products or material (including certain
OREX Degradables woven products) imported from China to the United States are
subject to import quotas which restrict total volume of such items available for
import by the Company, creating risks of limited availability and increased
costs for certain OREX Degradables woven products. See "Business - Manufacturing
and Supplies."
The Company's cost to manufacture OREX Degradable products to date have
not been acceptable. See "Risk Factors - Limited Operating History; Net Losses".
There can be no assurances that the Company will be able to reduce its cost to
manufacture such product. To date, the Company has been unable to manufacture
OREX Degradables film and thermoformed and extruded products at an acceptable
cost. The Company has recently begun to develop the use of new polymers to test
manufacture OREX Degradables film and thermoformed and extruded products. While
the Company has undertaken an evaluation of these new products, no assurances
can be provided that the Company will be successful in manufacturing on a
commercial basis OREX Degradables products from these polymers or that such
products will comply with applicable regulatory requirements.
The Company's products must be manufactured in compliance with FDA and
other regulatory requirements while maintaining product quality at an acceptable
manufacturing cost. The Company has limited experience in manufacturing its
non-woven and woven OREX products, and no experience in internally manufacturing
its other OREX products, in the quantities required for profitable operations.
Prior to the Company's commencement of such manufacturing operations, no one had
manufactured OREX Degradables. There can be no assurance that manufacturing or
quality control problems will not arise at manufacturing plants used to supply
the Company's products, that the Company will be able to manufacture products of
an acceptable quality at commercially acceptable costs or that the Company will
be able to maintain the necessary licenses from governmental authorities to
continue to manufacture its OREX Degradables products.
The Company has from time to time experienced delays in manufacturing
certain OREX Degradables products. The Company has also from time to time
encountered dissatisfaction with certain quality or performance characteristics
of its products. These delays and quality or performance issues may have
resulted in the loss of certain potential hospital customers. While management
believes that it has identified and is addressing the causes for such delays and
while the Company continually seeks to improve its products, there can be no
assurance that future delays or quality concerns will not occur or that past
customer relations on these products will not adversely affect future customer
relations and operating results.
The Company is continually in the process of making improvements to its
technologies and systems for manufacturing its OREX Degradables products, while
simultaneously marketing and supplying various of these products. From time to
time, the Company has invested in inventory of certain OREX Degradables products
which subsequently have been rendered obsolete by improvements in manufacturing
technologies and systems. There can be no assurances that possible future
improvements in manufacturing processes or products will not render other
inventories of product obsolete, thereby adversely affecting the Company's
financial statements.
During 1996, an anti-dumping order was issued which requires that
domestic importers of PVA resin post import bonds or pay cash deposits in the
amount of certain scheduled margins (the "Anti-dumping Margins") of 19% (for PVA
imported from Taiwan), 77% (for PVA imported from Japan), and 116% (for PVA
imported from producers in the People's Republic of China other than Sichuan
Vinylon Works which was excluded from the case) of the raw material cost upon
importing such raw materials. The anti-dumping order explicitly excludes PVA
fiber. PVA resin, which is subject to the order, is a raw material required to
manufacture OREX Degradables film, extruded and thermoformed OREX Degradables.
PVA fiber, which is not subject to the order, is the raw material required to
manufacture OREX Degradables woven and non-woven products. To date, the
anti-dumping order has not had a direct material effect on the Company as the
Company has not to date used substantial quantities of PVA resin. Such
anti-dumping order may have resulted in increases to the Company's costs for raw
materials over that which might otherwise have prevailed. The price of raw
materials used by the Company in manufacturing its OREX Degradables products has
been a significant component to the Company's total manufacturing costs for
these products. Prevailing prices for such raw materials have adversely affected
the Company's ability to achieve profitable gross margins on the Company's sale
of OREX Degradables products. The Company does not currently anticipate any
difficulty in satisfying its requirements for PVA resin as such raw material is
available from a number of suppliers.
The production of the Company's products is based in part upon
technology that the Company believes to be proprietary. The Company has provided
this technology to contract manufacturers, on a confidential basis and subject
to use restrictions, to enable them to manufacture products for the Company.
There can be no assurance that such manufacturers or other recipients of such
information will abide by any confidentiality or use restrictions.
Protection of Technologies. The Company's success will depend in part
on its ability to protect its technologies. The Company relies on a combination
of trade secret law, proprietary know-how, non-disclosure and other contractual
provisions and patents to protect its technologies. Failure to adequately
protect its patents and other proprietary technologies, including particularly
the Company's intellectual property concerning its OREX Degradables, could have
a material adverse effect on the Company and its operations. The Company holds
various issued patents and has various patent applications pending relative to
its OREX Degradables products.
See "Business - Technology and Intellectual Property".
Although management believes that the Company's patents and patent
applications provide or will provide adequate protection, there can be no
assurance that any of the Company's patents will prove to be valid and
enforceable, that any patent will provide adequate protection for the
technology, process or product it is intended to cover or that any patents will
be issued as a result of pending or future applications. Failure to obtain the
patents pursuant to the applications described above could have a material
adverse effect on the Company and its operations. It is also possible that
competitors will be able to develop materials, processes or products, including
other methods of disposing of contaminated waste, outside the patent protection
the Company has or may obtain, or that such competitors may circumvent, or
successfully challenge the validity of, patents issued to the Company. Although
there is a statutory presumption of a patent's validity, the issuance of a
patent is not conclusive as to its validity or as to the enforceable scope of
the claims of the patent. In the event that another party infringes the
Company's patent or trade secret rights, the enforcement of such right is at the
option of the Company and can be a lengthy and costly process, with no guarantee
of success. Further, no assurance can be given that the Company's other
protection strategies such as confidentiality agreements will be effective in
protecting the Company's technologies. Due to such factors, no assurance can be
given that the various components of the Company's technology protection
arrangements utilized by the Company, including its patents, will be successful
in preventing other companies from making products competitive with those
offered by the Company, including OREX Degradables.
Although to date no claims have been brought against the Company
alleging that its technology or products infringe upon the intellectual property
rights of others, there can be no assurance that such claims will not be brought
against the Company in the future, or that any such claims will not be
successful. If such a claim were successful, the Company's business could be
materially adversely affected. In addition to any potential monetary liability
for damages, the Company could be required to obtain a license in order to
continue to manufacture or market the product or products in question or could
be enjoined from making or selling such product or products if such a license
were not made available on acceptable terms. If the Company becomes involved in
such litigation, it may require significant Company resources, which may
materially adversely affect the Company. See "Business - Technology and
Intellectual Property".
Competition. The health care industry is highly competitive. There are
many companies engaged in the development, manufacturing and marketing of
products and technologies that are competitive with the Company's products and
technologies. Many such competitors are large companies with significantly
greater financial resources than the Company. Sellers and purchasers of medical
products have undergone consolidations in recent years, resulting in increasing
concentration of the market for disposable medical products with a few companies
and increasing cost pressures. This industry trend may place the Company at a
competitive disadvantage. The Company believes that these trends have adversely
affected the Company's ability to adjust its prices for its OREX Degradables
products to take into account disposal cost savings provided by such products,
in addition to adversely affecting the Company's ability to successfully
penetrate potential customer accounts. The Company believes that these trends
have also adversely affected the Company's procedure tray business by, among
other things, reducing the amount of the Company's procedure tray sales thereby
adversely affecting operating results. The market for disposable medical
products is very large and important to the Company's competitors. Certain of
the Company's competitors serve as the sole distributor of products to a
significant number of hospitals. There can be no assurance that the Company's
competitors will not substantially increase the resources devoted to the
development, manufacturing and marketing of products competitive with the
Company's products. The successful implementation of such strategy by one or
more of the Company's competitors could have a material adverse effect on the
Company. See "Business - Competition".
Risks of Technological Obsolescence. Many companies are engaged in the
development of products and technologies to address the need for safe and
cost-effective disposal of potentially infectious and hazardous waste. There can
be no assurance that superior disposal technologies will not be developed or
that alternative approaches will not prove superior to the Company's products.
The Company's products could be rendered obsolete by such developments, which
would have a material adverse effect on the Company's operations and
profitability.
Reliance Upon Distributors. The Company has historically relied on
large distributors for the distribution of its products. Hospitals purchase most
of their products from a few large distributors. Of these distributors, Owens &
Minor accounted for more than 10% of the Company's total sales during 1998.
Sterile Concepts has historically been a significant customer of White Knight,
based in part on a supply agreement between White Knight and Sterile Concepts
which required that Sterile Concepts purchase a minimum of $5.1 million of
product from White Knight annually until June 30, 1998. In mid-1996, Sterile
Concepts was acquired by Maxxim, the latter of which is a competitor of White
Knight. While Sterile Concepts remained obligated to satisfy its minimum
purchase requirement under its supply agreement with White Knight until such
agreement expired in 1998, Sterile Concepts failed to fulfill its purchase
obligations under such agreement. Recent regulatory developments regarding the
Company's LTS products described under "Business - Government Regulation" may
have caused Allegiance to substantially reduce its purchases of the Company's
existing LTS products. The Company believes that Allegiance may have begun to
purchase products competitive with those of LTS manufactured by a third party
which have been registered under FIFRA. Until 1996, Allegiance was the sole
distributor for the Company's LTS products and remains the most significant
distributor of such products. Reduction of such purchases by Allegiance has had
a material adverse effect upon the Company's operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". If the efforts of the Company's distributors prove unsuccessful, or
if such distributors abandon or limit their distribution of the Company's
products, the Company's sales may be materially adversely affected.
Regulatory Risks. The development, manufacture and marketing of the
Company's products are subject to extensive government regulation in the United
States by federal, state and local agencies including the EPA, the FDA and state
and local sewage treatment plants. Similar regulatory agencies exist in other
countries with a wide variety of regulatory review processes and procedures,
concerning which the Company relies to a substantial extent on the experience
and expertise of local product dealers, distributors or agents to ensure
compliance with foreign regulatory requirements. The process of obtaining and
maintaining FDA and any other required regulatory clearances or approvals of the
Company's products is lengthy, expensive and uncertain, and regulatory
authorities may delay or prevent product introductions or require additional
tests prior to introduction. The Company currently holds 510(k) clearances
issued by the FDA which the Company believes satisfy FDA required clearances for
marketing of the Company's existing products. The FDA has issued to the Company
510(k) clearances on OREX Degradables products for surgical sponges, operating
room towels, drapes, gowns, surgeon's caps, surgeon's vests, shoe covers and
medical bedding. The Company is currently developing, evaluating and testing
certain OREX Degradables film and thermoformed or extruded OREX products
manufactured from non-PVA polymers, and it is possible that new 510(k)
clearances will be required for such products. There can be no assurance as to
when, or if, other such 510(k) clearances necessary for the Company to market
products developed by it in the future will be issued by the FDA. The FDA also
requires health care companies to satisfy the quality system regulation. Failure
to comply with applicable regulatory requirements, which may be ambiguous or
unclear, can result in fines, civil and criminal penalties, stop sale orders,
loss or denial of approvals and recalls or seizures of products. There can be no
assurance that changes in existing regulations or the adoption of new
regulations will not occur, which could prevent the Company from obtaining
approval for (or delay the approval of) various products or could affect market
demand for the Company's products.
Recent developments regarding the Company's LTS products have had and
may continue to have a material adverse effect upon the Company's operating
results. In November, 1997, the State of California revoked its approval for
direct landfill disposal (without sterilization) of LTS-treated waste within
such state. In February 1998 EPA announced a new policy that FIFRA requires that
products, such as LTS, which hold state approvals related to anti-microbial
efficacy, such as state approvals for landfill of LTS-treated waste, impliedly
make claims about killing microorganisms which would require that LTS be
registered under FIFRA. LTS has not been registered under FIFRA and, based in
part on meetings by the Company with the EPA, the Company continues to sell LTS
without such registration. The Company now is marketing LTS without relying upon
any state approvals for direct landfill disposal. The Company also is in the
process of seeking expedited registration of a new version of LTS under FIFRA.
However, such developments have adversely affected the Company's sales of LTS.
Further, there can be no assurances that the Company will be successful in
obtaining registration of its LTS product. The EPA's change in policy could
cause the Company to become subject to an order to stop sales of LTS or be
subject to fines, penalties or other regulatory enforcement procedures, any one
or more of which could have a material adverse effect on the Company and its
results of operations.
Users of OREX Processors may be subject to regulation by local sewage
treatment plants to the extent that discharges from OREX Processors may
interfere with the proper functioning of such plants. The Company has approached
numerous sewage treatment plants requesting their approval to dispose of OREX
Degradables through the municipal sewer system. Although the Company has
obtained a total of over 100 non-binding written and verbal concurrences from
sewage treatment plants, certain of the founder hospitals and other hospitals
who have indicated an interest in purchasing OREX Degradables and an OREX
Processor are located in municipalities where such approvals have not been, and
may never be, obtained. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX products will not interfere with the
proper functioning of sewage treatment plants thereby adversely affecting the
Company's ability to successfully commercialize such newly developing OREX
Degradables technology. There can be no assurance that disposal of OREX
Degradables in areas where these approvals have not been granted will not result
in fines, penalties or other sanctions against product users or adversely affect
market demand for the Company's products.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. In addition, the Company is subject to a
variety of occupational safety and health laws and regulations, including the
Occupational Safety and Health Act of 1973 ("OSHA"). While the Company believes
that its facilities are substantially in compliance with these requirements, a
determination that the Company is not in compliance with the ADA, OSHA or
related laws and regulations could result in the imposition of fines or other
penalties or, with respect to the ADA, an award of damages to private litigants.
See "Business - Government Regulation".
Environmental Matters. The Company is subject to various federal,
state, local and foreign environmental laws and regulations governing the
discharge, storage, handling and disposal of a variety of substances and waste
used in or generated by the Company's operations. There can be no assurance that
environmental requirements will not become more stringent in the future or that
the Company will not incur substantial costs in the future to comply with such
requirements or that future acquisitions by the Company will not present
potential environmental liabilities.
Health Care Reform. The federal government and the public have recently
focused considerable attention on reforming the health care system in the United
States. The current administration has pledged to bring about a reform of the
nation's health care system and, in September 1993, the President outlined the
administration's plan for health care reform. Included in the proposal were
calls to control or reduce public and private spending on health care, to reform
the payment methodology for health care goods and services by both the public
(Medicare and Medicaid) and private sectors, which may include overall
limitations on federal spending for health care benefits, and to provide
universal access to health care. A number of other health care proposals have
been advanced by members of both Houses of Congress. The Company cannot predict
the health care reforms that ultimately may be enacted nor the effect any such
reforms may have on its business. No assurance can be given that any such
reforms will not have a material adverse effect on the Company.
Product Liability. The manufacture and sale of the Company's products
entail an inherent risk of liability. Product liability claims may be asserted
against the Company in the event that the use of the Company's products are
alleged to have resulted in injury or other adverse effects, and such claims may
involve large amounts of alleged damages and significant defense costs. Although
the Company currently maintains product liability insurance providing $12.0
million in aggregate coverage for such claims, there can be no assurance that
the liability limits or the scope of the Company's insurance policy will be
adequate to protect against such potential claims. In addition, the Company's
insurance policies must be renewed annually. While the Company has been able to
obtain product liability insurance in the past, such insurance varies in cost,
is difficult to obtain and may not be available on commercially reasonable terms
in the future, if it is available at all. A successful claim against the Company
in excess of its available insurance coverage could have a material adverse
effect on the Company. In addition, the Company's business reputation could be
adversely affected by product liability claims, regardless of their merit or
eventual outcome. See "Business - Insurance".
Dependence on Key Personnel. The Company believes that its ability to
succeed will depend to a significant extent upon the continued services of a
limited number of key personnel. The loss of the services of any one or more of
these individuals could have a material adverse effect upon the Company.
Anti-Takeover Provisions. On December 19, 1996, the Company's Board of
Directors adopted a Shareholder Protection Rights Agreement (the "Rights
Agreement"). Under the Rights Agreement, a dividend of one right ("Right") to
purchase a fraction of a share of a newly created class of preferred stock was
declared for each share of common stock outstanding at the close of business on
December 31, 1996. The Rights, which expire on December 31, 2006, may be
exercised only if certain conditions are met, such as the acquisition (or the
announcement of a tender offer the consummation of which would result in the
acquisition) of beneficial ownership of 15 percent or more of the common stock
("15% Acquisition") of the Company by a person or affiliated group. The Rights,
if exercised, would cause substantial dilution to a person or group of persons
that attempts to acquire the Company without the prior approval of the Board of
Directors. The Board of Directors may cause the Company to redeem the Rights for
nominal consideration, subject to certain exceptions. The Rights Agreement may
discourage or make more difficult any attempt by a person or group of persons to
obtain control of the Company.
Liquidity Risks. While the Company believes that, based on its current
business plan, the Company's cash equivalents, existing credit facilities,
proceeds from divestitures and funds budgeted to be generated from operations in
the future will be adequate to meet its liquidity and capital requirements
through 1999, currently unforeseen future developments and possible increased
working capital requirements may require that the Company seek to obtain
additional debt financing or issue common stock. The Company's cash equivalents
decreased from $9.3 million at December 31, 1997 to $7.3 million at December 31,
1998. In addition, the Company had outstanding at December 31, 1998
approximately $23.1 million under its long term credit facility with the Chase
Manhattan Bank. In the past, the Company has violated certain covenants of such
credit facility, all of which covenant violations have been waived. Recently,
the Company negotiated certain modifications of such covenants in a manner which
the Company believes it will satisfy in the future. No assurances can be
provided that other violations of such credit facility will not occur in the
future or that, if such violations occur, those violations will be waived. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
ITEM 2. PROPERTIES
The Company maintains approximately 32,000 square feet of office,
manufacturing, production, research and development and warehouse space located
in Norcross, Georgia under a lease which expires December 30, 2000. The Company
consolidated its administrative offices to this Norcross facility during 1998,
and is in the process of selling its former administrative offices. The Company
also leases from a local economic development authority a 13,300 square foot
administrative building located in Columbus, Mississippi under a lease which
expires December 31, 2007.
The Company's custom procedure tray business is located in Herndon,
Virginia, a suburb of Washington, D.C., where it occupies approximately 69,100
square feet of space for office and production facilities, pursuant to a lease
agreement which expires December 31, 2003. The Company also leases approximately
60,000 square feet of space for its sterilization facilities and warehouse space
pursuant to a lease agreement which expires January 31, 2004, subject to a
renewal option through January 31, 2009.
The Company operates two existing non-woven conversion manufacturing
facilities through its White Knight subsidiary. The Company owns a 90,000 square
foot facility in Agua Prieta, Mexico (located adjacent to the Company's Douglas,
Arizona plant) which provides labor intensive post-cutting manufacturing
applications. The Company's Douglas, Arizona plant manufactures medical products
and specialty apparel in a 90,000 square foot facility held under a lease
expiring August 31, 2034. During 1997, the Company relocated its Acuna, Mexico
and Del Rio, Texas manufacturing operations to achieve operating cost savings,
and combined such operations with its existing operations in Agua Prieta, Mexico
and Douglas, Arizona.
The Company conducts its equipment drape and fluid control
manufacturing business from three locations. The Company owns two manufacturing
buildings totaling approximately 100,000 square feet located in Columbus,
Mississippi. The Company leases three manufacturing facilities totaling 66,000
square feet located in the Dominican Republic. During 1996, the Company also
entered into a lease of a 32,000 square foot facility located in Empalme,
Mexico, where it manufactures equipment drape and fluid control products. Such
lease expires February 1, 2001.
The Company also leases a facility in Jacksonville, Florida that
comprises approximately 45,000 square feet of warehouse and distribution space.
The Company uses this facility for distribution of finished products and
distribution of materials to the Company's Dominican Republic facility and light
manufacturing under a lease expiring April 1, 2003.
Through a subsidiary, the Company leases approximately 9,000 square
feet of space near Manchester, England, approximately 7,000 of which is used for
warehouse space and 2,000 of which is used for office space.
The Company believes that its present facilities are adequate for its
current requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation and legal
proceedings in the ordinary course of business. Such litigation and legal
proceedings have not resulted in any material losses to date, and the Company
does not believe that the outcome of any existing lawsuits will have a material
adverse effect on its business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the Company's
shareholders during the three months ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is traded and quoted on The Nasdaq Stock Market under
the symbol "OREX". The following table shows the quarterly range of high and low
sales prices of the common stock during the periods indicated since December 31,
1997.
Common Stock
Quarter Ended High Low
- ------------- -----------------
1997
First Quarter $ 8.37 $ 4.75
----------------------
Second Quarter $ 5.87 $ 2.68
-----------------------
Third Quarter $ 5.25 $ 2.68
-------------------------
Fourth Quarter $ 4.00 $ 1.90
---------------------
1998
First Quarter $ 3.93 $ 2.31
-------------------------
Second Quarter $ 3.00 $ 2.03
-----------------------
Third Quarter $ 3.06 $ 1.12
------------------------
Fourth Quarter $ 2.00 $ 1.03
-----------------------
On March 25, 1999, the closing sales price for the common stock as reported
by The Nasdaq Stock Market was $2.0938 per share.
As of March 25, 1999, the Company had approximately 20,300 shareholders,
including approximately 1,300 shareholders of record and 19,000 persons or
entities holding the Company's common stock in nominee name.
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. Moreover, the Company's
credit facility prohibits the Company from declaring or paying cash dividends
without the prior written consent of its lenders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". Accordingly, the Company does not intend to pay cash
dividends in the foreseeable future.
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth summary historical financial data for each
of the five years in the period ended December 31, 1998. As a result of the 1996
acquisition of Microtek, which was accounted for as a pooling of interests, the
Company's financial statements have been restated to include the results of
Microtek for all periods presented. The operations data for the year ended
December 31, 1995 includes only partial operating results of SafeWaste and White
Knight because these acquisitions occurred effective May 31, 1995 and September
1, 1995, respectively. On July 1, 1995, the Company acquired the infection
control drape line of Xomed in exchange for Microtek's otology product line and
the operations data for the year ended December 31, 1995 therefore includes only
partial operating results for such acquisition transaction. The operations data
for the year ended December 31, 1995 does not give effect to the November 30,
1995 acquisition of Medi-Plast International, Inc. ("Medi-Plast"), as such
acquisition was consummated at Microtek's fiscal year end on November 30, 1995.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., and the Company's results of operations include the results
of Venodyne only from the April 27, 1996 acquisition date. Additionally, during
1998 the Company disposed of its Arden and Charlotte, North Carolina and
Abbeville, South Carolina manufacturing facilities, its industrial and Struble &
Moffitt divisions of its White Knight subsidiary, and substantially all of its
net assets of its SafeWaste subsidiary. The summary historical financial data
should be read in conjunction with the historical consolidated financial
statements of the Company and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data appearing elsewhere in this Form 10-K. The summary
historical financial data for each of the five years in the period ended
December 31, 1998 has been derived from the Company's audited consolidated
financial statements.
Year Ended December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Net sales..................... $ 73,382 $ 104,874 $ 164,906 $ 159,940 $ 147,643
Cost of goods sold............ 49,928 74,953 128,598 142,093 109,936
----------- ----------- ---------- ---------- ---------
Gross Profit ....................... 23,454 29,921 36,308 17,846 37,707
Selling, general and 21,496 27,737 41,381 43,422 40,506
administrative ..............
Research and development .... 1,246 1,127 2,173 2,601 3,582
Amortization of intangibles . 1,505 2,411 4,290 3,847 2,052
Impairment loss ............ 0 0 0 57,310 7,445
Restructuring charge ........ 140 0 4,410 0 -
Costs associated with merger.. 0 0 3,372 0 -
----------- ----------- ---------- ---------- ---------
Total operating expenses ......... 24,587 31,275 55,626 107,180 53,585
----------- ----------- ---------- ---------- ---------
Loss from operations .............. (933) (1,354) (19,318) (89,334) (15,878)
----------- ----------- ---------- ---------- ---------
Net other income (expense) ....... 49 1,790 (1,316) (3,415) (3,222)
Income (loss) before tax, extraordinary
items and cumulative effect of change
in accounting principle ....... (884) 436 (20,634) (92,749) (19,100)
Income tax provision (benefit) ... 455 980 (639) 354 541
----------- ----------- ---------- ---------- ---------
Loss before extraordinary items and
cumulative effect of change in
accounting principle............. (1,339) (544) (19,995) (93,103) (19,641)
Extraordinary items ................ 0 0 457(2) 0
Cumulative effect of change 57(1) 0
in accounting principle........ 0 (800)(3) 1,404(2)
----------- ----------- ---------- ---------- ---------
Net loss......................... $ (1,282) $ (544) $ (20,452) $ (93,903) $ (18,237)
=========== ========== =========== ========= ===========
Loss per common and common equivalent share
-Basic and Diluted
Loss before extraordinary item and
cumulative effect of change in
accounting principle ... $ (0.05) $ (0.02) $ (0.52) $ (2.37) $ (0.49)
Extraordinary items ......... 0.00 0.00 (0.01) - 0.03
Cumulative effect of change in
accounting principle ........ 0.00 0.00 0.00 (0.02)
----------- ----------- ---------- ---------- ---------
Net loss ..................... $ (0.05) $ (0.02) $ (0.53) $ (2.39) $ (0.46)
=========== =========== ========== ========== =========
Weighted average number of common and
common equivalent shares outstanding 27,080 33,704 38,763 39,273 39,655
- -----------------
(1) The change in accounting principle reflects the adoption on January 1, 1994
of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
(2) Gives effect to the gain from the extinguishment of debt in 1998 and the
loss from refinancing of Isolyser's and Microtek's credit facilities, net of tax
benefits of $332,000 in 1996
(3) The change in accounting principle reflects the adoption of Emerging Issues
Task Force ("EITF") No. 97-13, "Accounting for Costs Incurred in Connection with
a Consulting Contract or an Internal Process that Combines Processing
Reengineering and Information Technology Transformation."
December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working Capital....................... $ 88,527 $ 101,022 $ 91,962 $ 72,408 $ 39,124
Intangible assets, net................. 17,994 60,004 57,331 30,803 29,128
Total assets............................. 132,973 253,261 250,935 144,334 109,518
Long-term debt......................... 6,779 26,413 47,029 37,546 18,366
Redeemable common stock.......... 1,717 0 0 0 0
Total shareholders' equity............ $ 110,662 $ 195,298 $ 178,804 $ 86,117 $ 68,676
(1) Pursuant to SFAS No. 121 the Company classified $35.8 million of net assets
related to its OREX manufacturing facilities and White Knight subsidiary as held
for sale, and included such amount in current assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company was incorporated in 1987 and commenced operations in 1988
with the introduction of its SMS products. In 1990, the Company introduced its
LTS products and thereafter introduced others of its safety products and
services. During 1993, the Company completed the Atkins Acquisition and the
MedSurg Acquisition and began to sell standard and custom procedure trays.
Because these acquisitions have been accounted for using the purchase method,
the Company's 1993 operating results include the operations of Atkins from
February 28, 1993, but do not include any of the operating results of MedSurg
which was acquired on December 31, 1993.
On July 1, 1995, Microtek acquired the infection control drape line of
Xomed, in exchange for Microtek's otology product line, thereby providing
Microtek greater concentration on its core business. On September 1, 1995,
Isolyser acquired White Knight and began the conversion manufacturing of
non-woven fabric into finished goods such as drapes and gowns. On November 30,
1995, Microtek acquired Medi-Plast, a manufacturer of equipment drapes. Because
these acquisitions were accounted for using the purchase method, the Company's
operating results do not include the operating results of the acquired
operations for periods prior to these respective acquisition dates.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., which manufactures and markets pneumatic pumps and disposable
compression sleeves for use in reducing deep vein thrombosis, and the Company's
results of operations include the results of Venodyne only from the April 27,
1996 acquisition date. Effective September 1, 1996, Isolyser completed its
merger with Microtek, which was accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated for all
periods to combine the financial statements of each of Isolyser and Microtek.
In March 1998, the Company announced a plan to dispose of its OREX
manufacturing facilities and its White Knight subsidiary. In August 1998, the
Company disposed of its Arden and Charlotte, North Carolina OREX manufacturing
facilities, and substantially all of the net assets of the industrial division
of its White Knight subsidiary and its SafeWaste subsidiary. In 1998 the Company
disposed of the Struble & Moffitt division of its White Knight subsidiary. In
October 1998, the Company disposed of its Abbeville, South Carolina OREX
manufacturing facility. The Company maintains a 19.5% minority interest in the
company formed to own and operate the Abbeville and Arden facilities.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales for 1998 were $147.6 million compared to $159.9 million for
1997, a decline of 7.7%. The 1998 decline of $12.3 million reflects a 14.6%
decrease in White Knight Healthcare product net sales as compared to 1997, a
39.7% decrease in White Knight Industrial product net sales as compared to 1997,
a 10% decline in net sales of safety products over comparable 1997 sales, a 1%
decline in Microtek net sales as compared to 1997 and a 0.5% increase in sales
of MedSurg products over comparable 1997 sales.
The decline in sales of White Knight products was primarily due to the
aforementioned sale of the industrial division of White Knight as well as the
Company's decision to de-emphasize marketing of White Knight products in favor
of higher margin products sold by its other subsidiaries. The Company has
announced plans to sell White Knight which, if consummated, would significantly
reduce the Company's net sales. See "Risk Factors Risks of Planned
Divestitures".
Sales of the Company's safety products have been materially adversely
affected by the substantial reduction in purchases of LTS products by
Allegiance, the primary distributor of such produc