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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000 Commission File Number: 0-24866
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ISOLYSER COMPANY, INC.
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(Exact Name of registrant as specified in its charter)
GEORGIA 58-1746149
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4320 INTERNATIONAL BOULEVARD
NORCROSS, GEORGIA 30093
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(Address of principal executive offices) (Zip Code)
(770) 806-9898
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of Act:
None
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.001 par value per share
stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of common stock held by nonaffiliates of the
registrant based on the sale trade price of the common stock as reported on The
Nasdaq Stock Market on March 16, 2001, was approximately $34.3 million. For
purposes of this computation, all officers, directors and 5% beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors or 5% beneficial owners are,
in fact, affiliates of the registrant.
At March 16, 2001, there were outstanding 41,593,984 shares of the registrant's
common stock, $.001 par value per share.
Documents incorporated by reference: Certain exhibits provided in Part IV are
incorporated by reference from the Company's Registration Statements on Form S-1
(File Nos. 33-83474 and 33-97086), Registration Statement on Form S-4 (File No.
333-7977), Registration Statement on Form S-8 (File Nos. 33-85668), annual
reports on Form 10-K for the periods ended December 31, 1994, December 31, 1995,
and December 31, 1996, quarterly report on Form 10-Q for the period ended
September 30, 1999, Schedule 14A filed on April 14, 1999, and current reports on
Form 8-K dated May 31, 1995, September 18, 1995, June 4, 1996, August 30, 1996,
December 19, 1996, August 11, 1998, June 29, 1999 and July 12, 1999.
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Note: The discussions in this Form 10-K contain forward-looking
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statements that involve risks and uncertainties. The actual results of Isolyser
Company, Inc. and subsidiaries (the "Company") could differ significantly from
those set forth herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Business",
particularly "Business - Risk Factors", and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere in this Form 10-K. Statements contained in this Form 10-K
that are not historical facts are forward-looking statements that are subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.
A number of important factors could cause the Company's actual results for 2001
and beyond to differ materially from those expressed or implied in any forward-
looking statements made by, or on behalf of, the Company. These factors include,
without limitation, those listed in "Business - Risk Factors" in this Form 10-K.
PART I.
ITEM 1. BUSINESS
General
Isolyser Company, Inc. ("Isolyser" or the "Company") currently has two
major operating units. OREX Technologies International ("OTI"), a division of
Isolyser, focuses on the commercialization of Isolyser's disposal technologies.
The other unit, Microtek Medical, Inc. ("Microtek"), an Isolyser subsidiary, is
the centerpiece of Isolyser's Infection Control business serving the healthcare
industry.
OTI believes that it is the first company to offer high performance
contamination control materials and products coupled with engineered systems for
the treatment and disposal of those materials and products. Isolyser takes a
life cycle approach to engineering its materials and disposal systems for those
materials to include material performance requirements, waste management
analysis, regulatory compliance and life cycle cost management. The Company
focuses upon markets requiring high performance materials subject to regulatory
requirements such as hospital operating rooms, the nuclear industry and metal
painting operations in the automotive industry.
Microtek's broad range of healthcare products provide patient care and
safety benefits, including protection from cross-infection, by providing Point-
of-Generation(TM) treatment of potentially infectious and hazardous waste. The
Company believes that its products benefit the environment by reducing the
volume of solid waste while significantly reducing the disposal costs of such
waste. In this way, Isolyser offers protection from potentially infectious and
hazardous waste for patients, staff, the public and the environment. Similar to
the healthcare industry, some industrial markets, such as metal painting
operations in the automotive and aerospace industries and the nuclear industry,
operate heavily regulated "controlled environments". Any product or service that
is supplied to these markets must satisfy detailed materials and product
performance specifications, as well as comply with regulations for the disposal
of hazardous waste. In these and many other demanding industrial markets,
Isolyser's technology of materials, products and engineered treatment and
disposal systems offers a unique combination of product features and end-user
benefits including life cycle cost management and ecological advantages.
In 2000, the Company formed a new subsidiary, MindHarbor, Inc.
("MindHarbor"). MindHarbor provides information technology services including
website and intranet design and support, marketing and electronic commerce
business development. To date, MindHarbor's revenues and operating results have
not been material to the Company.
Business Strategy
The Company's goal is to become a leading developer and provider of high
performance materials and integrated technology systems for the treatment and
disposal of those materials in markets subject to environmental or regulatory
control. The Company intends to improve its operating results through the
commercialization of its OREX(R) Degradable products, increased focus upon the
infection control business of Microtek, and continued new product development.
Commercializing OREX Degradables. The Company seeks to commercialize its
OREX Degradable products by improving the product to better satisfy customer
needs and provide added value within a range of markets. The Company seeks to
achieve these goals through offering materials with superior product performance
and contamination control characteristics, while reducing material costs on a
life cycle basis from materials purchasing through disposal, and accomplishing
the foregoing in an ecologically beneficial way. To expand its
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resources, the Company from time to time seeks to enter into strategic alliances
with third parties to more rapidly commercialize OREX Degradables. There can be
no assurance that OREX Degradables will achieve or maintain substantial
acceptance in their target markets. See "Risk Factors - History of Net Losses"
and "-Marketing Risks Affecting OREX Products".
Increased Focus on Infection Control Businesses. The Company seeks to
increase sales and earnings from its infection control business by completing
strategic acquisitions, enhancing marketing and distribution efforts both
domestically and internationally, introducing new products, increasing direct
sales representation, employing tele-sales agents for added sales coverage, and
capitalizing on low-cost manufacturing opportunities in the Dominican Republic.
Continuing New Product Development. The Company plans to continue to
improve, develop and introduce new and innovative products to the marketplace
designed to promote cost-effective achievement of occupational safety,
environmental protection and regulatory compliance objectives through continued
research and development. In addition, the Company will continue to substantiate
the safety and effectiveness of its products with testing and seek regulatory
approval for use of its products where applicable. See "Risk Factors - Marketing
Risks Affecting OREX Products" and "- Regulatory Risks".
Products and Markets
OREX Degradables and Enviroguard
OREX Degradables and Enviroguard(TM) are a combination of materials and
products that provide protection to people and the environment while providing
cost effective solutions to the problems associated with solid waste reduction
and disposal. OREX Degradables are manufactured from two generations of hot
water dispersible materials which can be configured into an array of materials
and products. The materials include woven and nonwoven fabrics; resin; film and
hard plastics and profile extruded materials. Woven fabrics converted into
healthcare products include operating room towels, absorbent gauze and
laparotomy sponges. Nonwoven fabrics converted into healthcare products include
surgical gowns, patient drapes, mop heads and surgical head wear. Film may be
converted into products including fluid collection bags, packaging materials and
equipment drapes. Products for a wide range of other market sectors generically
known as industrial markets include wiping substrates; mops; protective apparel
and other items of personal protective equipment. OREX Degradables perform like
traditional disposable and reusable products; however, unlike traditional
products, OREX Degradables can be degraded or dissolved in hot water in a
specially designed OREX Processor after use for safe disposal through the
municipal sewer system or other specialty engineered treatment and disposal
systems. Enviroguard is the Company's trademark for a spunlaced OREX Degradables
fabric that is softer, more flexible and cooler than earlier generation OREX
products. See "Risk Factors - History of Net Losses", "- Marketing Risks
Affecting OREX Products", "- Manufacturing and Supply Risks" and "- Regulatory
Risks".
The Company was initially focused on delivering OREX Degradables to the
healthcare industry. In connection with the Company's sale of its MedSurg
business to Allegiance on July 12, 1999, Isolyser granted to Allegiance an
exclusive worldwide license to manufacture, use and sell products made with
Isolyser's proprietary degradable materials for use in healthcare applications.
Under the terms of the license, Isolyser will be the sole supplier to Allegiance
of OREX degradable materials for use in the healthcare field provided Isolyser
satisfies its supply obligations. Allegiance is committed to purchase a certain
minimum quantity of Enviroguard fabric, subject to reduction if Isolyser fails
to obtain regulatory approvals for the dissolution of material in certain
scheduled markets within certain scheduled timeframes. If Allegiance fails to
satisfy its purchase commitment, the license becomes non-exclusive. Allegiance
has agreed to pay Isolyser a royalty equal to a percentage of the net sales
price of product sold by Allegiance to customers who use the product dissolution
technology. The license has an initial term expiring in April, 2003. In the
event of the acquisition of more than 50% of the outstanding capital stock of
Isolyser or the sale of all or substantially all Isolyser's assets to a person
or entity not affiliated with Isolyser, the license extends for three years
following the date of such change in control and becomes non-exclusive. In
January 2001, the Company and Allegiance entered into an agreement suspending
Allegiance's minimum purchase obligation until such time as Isolyser has
satisfactorily resolved certain development challenges including the completion
and installation of a new generation of OREX processors and reevaluation of the
economic terms of the license. Isolyser and Allegiance agreed to pursue these
development challenges through the remainder of 2001, at which time the parties
would jointly review and evaluate all options relating to the ongoing
relationship between Allegiance and Isolyser. No assurances can be
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provided that the parties will successfully commercialize OREX Degradables in
the healthcare industry. See "Risk Factors - Marketing Risks Affecting OREX
Products".
Management also believes that the technology used to develop OREX
Degradables has the potential for commercial applications beyond the healthcare
industry where protection from potentially infectious or hazardous waste and
reduction of solid waste is important, such as the automotive paint and nuclear
power industries. Under an agreement dated June 14, 1999, the Company has
granted RJ Hanlon Company, Inc. a three year license providing for exclusive
global distribution rights to covers manufactured from OREX film for robots used
in automotive paint operations and non-exclusive rights for the distribution and
sale of OREX specialty wipes in the North American automobile industry. RJ
Hanlon has manufactured and sold custom designed covers for the automobile
industry for approximately twenty years. The OREX robot covers have passed
independent laboratory tests for cleanliness and paint operation compatibility
for two North American automobile manufacturers. On February 16, 2001, the
Company acquired a disposal technology which in laboratory tests has
successfully degraded OREX Degradables contaminated with low level radioactive
waste resulting in substantial reductions of contaminated waste. This technology
is presently being developed for use in the nuclear power industry. To date, no
significant sales have been made by Isolyser to the automotive painting or
nuclear power industry. See "Risk Factors - Marketing Risks Affecting OREX
Products".
Unlike traditional disposable products that must be disposed of through
either incineration or landfill, OREX Degradables may be disposed of at the
Point-of-Generation by dissolving or degrading the product through processing
the OREX material in hot water. Disposal in this manner reduces the need for
storage, handling and off-site transportation of waste, reduces the potential
for cross-infection, reduces the total volume of solid waste and facilitates
regulatory compliance. It is also designed to facilitate life-cycle cost
reduction and environmentally responsible disposal of waste. The processing of
OREX materials may involve special engineering requirements depending upon the
industry in which the processing technology is being used. For example, the
healthcare industry's processing of OREX largely involves the disposal of blood
with or without infectious disease contamination. In this industry, the Company
uses an OREX processor similar to a commercial washing machine to process the
material for disposal through the municipal sewer system. An industry standard
method for disposal of blood, with or without infectious disease contamination,
is through the municipal sewer system. While the Company makes no claims or
representations in its product advertising or labeling that the disposal method
for OREX Degradables renders the disposal matter non-infectious, independent
test results indicate that dissolving OREX Degradables in hot water inactivates
in excess of 99% of tested microorganisms. Disposal in this manner is not
subject to federal regulation but may be regulated by state and local sewage
treatment plants to the extent that sewer discharges from hospitals or other
facilities may interfere with the proper functioning of such plants. Based on
product testing and available research, the Company believes that OREX
Degradables manufactured from PVA will not interfere with the proper functioning
of sewage treatment plants. Based on such testing and research, the Company has
obtained over 100 written and verbal non-binding concurrences and is in the
process of seeking additional non-binding concurrences with the Company's
conclusions from local authorities. While the Company is undertaking evaluation
of OREX Degradables manufactured from polymers other than PVA, no assurances can
be provided that such non-PVA based OREX will not interfere with the proper
functioning of sewage treatment plants. The processing of OREX materials in the
automotive paint and nuclear power industries involves separate engineering
requirements. In the automotive industry, paint and solvent contaminated waste
is classified as hazardous and incurs a high cost of disposal. OTI has developed
a processing and wastewater treatment system that renders OREX Degradables
materials non-hazardous accompanied by a reduction in hazardous waste disposal
costs. Based on industry tests conducted to date, this method of waste
management complies with automotive wastewater treatment and permitting
requirements. In the nuclear industry, OTI has acquired a disposal technology
which in laboratory tests has successfully achieved substantial reductions in
the volume of OREX Degradable materials contaminated with low level radioactive
waste resulting in the potential for disposal cost savings. See "- Government
Regulation" and "Risk Factors - Regulatory Risks".
Management has not been satisfied with the Company's performance to date
in manufacturing and selling OREX Degradables. In particular, the Company has
failed to achieve profitable margins on sales of OREX products. Accordingly, the
Company has sought to improve its operating results by, among other things,
reducing its marketing efforts directed towards the sale of OREX Degradables,
divesting itself of underperforming assets, reducing the amount of its debt, and
forming the OTI business unit to provide increased focus on OREX commercial
development. As a result of the Company's sale of its selling, marketing and
manufacturing facilities previously used for OREX products, OTI now engages in
the strategy of relying upon third parties for such selling, marketing and
manufacturing functions. See "- Marketing and Distribution", "- Manufacturing
and Supplies", "Risk Factors - History of Net Losses", "- Marketing Risks
affecting OREX Products" and "-Manufacturing and Supply Risks".
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Infection Control Products
In 1998 the Company formed a business unit called the Infection Control
Group which consists primarily of the equipment drape, fluid control and safety
products manufactured by Microtek. Consistent with its niche market strategy,
Microtek is actively engaged in the development of new products and the
refinement of its existing products to respond to the needs of its customers and
the changing technology of the medical products industry. Many of the Company's
product innovations have been generated from requests by the Company's customers
and health care professionals for products to be custom designed to address
specified problems in the operating room environment. The Company also monitors
trends in the health care industry and performs market research in order to
evaluate new product ideas. No assurance can be given that any new product will
be successfully developed or that any newly developed product will achieve or
sustain market acceptance.
Microtek designs, manufactures and markets two principal product lines
for use in niche markets of the healthcare industry. First, Microtek's infection
control products consist of more than 1,500 specially designed drapes for use in
draping operating room equipment during surgical procedures. This equipment
includes, for example, microscopes, ultrasound probes, endoscopic video cameras,
x-ray cassettes, imaging equipment, lasers and handles attached to surgical
lights. In addition to reducing the risk of cross-infection, these products
increase operating room efficiency by reducing the need to sterilize equipment
between procedures. These disposable sterile products are generally made from
plastic film containing features designed for the operating room environment,
such as low glare and anti-static features. During 1999 the Company completed
its development of a complete line of plastic (film) patient drapes that include
a full line of adhesive incise drapes including a subset of adhesive drapes that
have an anti-microbial agent incorporated into the film. The anti-microbial
incise drapes are patented and are a joint development of the Company and
Microban Products Company and are marketed under the trade names of Microtek
Medical and Microban(R). Microtek's second principal product line, fluid-control
products, are specially designed disposable pouches which are attached to a
surgical patient drape (called a substrate), which is placed around the
operative site. For instance, Microtek manufactures a specialty pouch for knee
arthroscopy. This pouch captures not only the bodily fluids that are discharged
from the knee but also the sterile saline that is infused into the operative
site during the arthroscopic procedure. Microtek's fluid control product line
primarily consists of more than 200 different plastic disposable collection
pouches.
In the first quarter 2001, Microtek acquired substantially all of the
assets of Deka Medical, Inc. ("Deka") used in Deka's drape product lines. These
products are highly compatible with Microtek's product lines. The Company
believes this transaction will benefit the Company by leveraging Deka's revenues
on the existing manufacturing and selling infrastructure in place at Microtek,
improving the diversification of Microtek's customer base and product line, and
adding experienced management to Microtek's existing personnel.
For 1998, 1999 and 2000, sales of Microtek products accounted for
approximately 33%, 59% and 92% of the Company's total revenues, respectively.
Included in such sales figures are $8.6 million, $6.8 million and $5.7 million
of export sales by Microtek during 1998, 1999 and 2000, respectively.
The Company offers several other lines of products for the management of
potentially infectious and hazardous waste. The leading lines of these safety
products are described below.
Liquid Treatment System (LTS) is a super-absorbent powder which converts
potentially infectious liquid waste into a solid waste, subject to applicable
regulatory requirements. LTS is typically added to a suction canister or other
fluid collection device in which blood or other body and irrigation fluids are
collected during surgery or in wound drainage after surgery. LTS converts liquid
waste into a solid waste, thereby facilitating handling, transportation and
disposal. Regardless of whether LTS is disposed of in landfills or through
incineration or other special process, LTS provides advantageous occupational
safety benefits by Point-of-Generation treatment of potentially infectious
liquid waste. Microtek is in the process of bringing the next generation product
to the market called LTS-Plus. LTS-Plus is EPA registered as a medical waste
treatment product. This adds the extra benefit to the end-user of being able to
dispose of LTS-Plus treated waste directly in a landfill, where local regulation
permits. See "- Government Regulation".
Sharps Management System (SMS) is designed to encapsulate and physically
disinfect contaminated sharps (such as needles, syringes, scalpels, etc.) at the
Point-of-Generation. The product consists of a puncture- and spill-resistant
plastic container partially filled with a bathing solution for encapsulation.
When full, a small amount of catalyst powder is added. The catalyst creates a
chemical reaction which heats the container and solidifies the contents,
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thus encapsulating the sharps and reducing the risk of accidental punctures. The
container of SMS treated sharps is suitable for handling, transportation and
disposal.
The Company also manufactures and markets various other products. In
April, 1996, Microtek purchased the Venodyne division of Advanced Instruments,
Inc. which manufactures and markets pneumatic pumps and disposable compression
sleeves for use in reducing deep vein thrombosis. Sales of these products have
not been material to the Company's results of operations.
The Company acquired Microtek in a pooling of interests transaction as
of September 1, 1996, and the Company's financial statements prior to the
acquisition date have accordingly been restated to include Microtek's financial
statements. Microtek is a Delaware corporation which, prior to the Microtek
acquisition, operated independently following its spin-off from Teknamed
Corporation, a medical products company, in 1984.
Marketing and Distribution
Substantially all of the Company's sales in 2000 were made to the
healthcare market.
As of December 31, 2000, the Company's marketing and sales force
consisted of 28 sales representatives, four field sales managers, one home
office sales manager, five marketing managers and 35 persons in customer
support.
The Company is dependent upon a few large distributors for the
distribution of its products. The Company's top three customers accounted for
approximately 27% of the Company's total revenues during 2000. Of these
customers, only Allegiance accounted for over 10% of the Company's total sales
during 2000. Due to the exclusive worldwide nature of the license granted by
Isolyser to Allegiance, the Company will depend exclusively upon Allegiance
during the term of that license for sales of OREX and Enviroguard products to
healthcare markets. Because distribution of medical products is heavily
dependent upon large distributors, the Company anticipates that it will remain
dependent upon these customers and others for the distribution of its products.
If the efforts of the Company's distributors prove unsuccessful, or if such
distributors abandon or limit their distribution of the Company's products, the
Company's sales may be materially adversely affected. See "Risk Factors -
Reliance Upon Distributors".
The Company sells its equipment drapes and fluid control products
through distributors and custom procedure tray companies. The Company also
markets certain of its products to other manufacturers on a "non-branded" or
private label basis. For example, the Company's fluid control pouches are sold
to manufacturers of substrates, and the Company's equipment drapes are sold to
manufacturers of the equipment for which such drapes were designed.
The Company's total export sales during 1998, 1999 and 2000 were $11.1
million, $7.0 million and $5.7 million, respectively. Outside the United States,
the Company markets its products principally through a network of approximately
162 different dealers and distributors. As of December 31, 2000, the Company
also had two sales representatives operating in international markets, and
maintains an office and warehouse distribution center near Manchester, England.
Isolyser sells its LTS product line under a non-exclusive distribution
agreement with Allegiance, a leader in the sale of suction canisters and related
apparatus. The agreement expires February 28, 2002 and is subject to renewal for
one-year terms thereafter unless otherwise terminated. The Company also
distributes LTS through other national distributors.
To further expand its marketing resources, the Company from time to time
seeks to enter into strategic alliances with third parties such as specialty
equipment manufacturers and other non-competitive companies which would enable
it to sell various of its products. While the Company from time to time engages
in such discussions, the Company provides no assurances that any such strategic
alliances will be consummated or, if consummated, that any such alliance will be
favorable to the Company.
Manufacturing and Supplies
OREX is manufactured from a family of organic polymers that dissolve or
disperse in hot water and degrade in the wastewater system or in custom designed
OREX processing equipment. Woven and nonwoven products are manufactured using
PVA-based polymer chemistry. PVA is a safe material used widely in a variety of
consumer products such as eye drops, cosmetics and cold capsules. The Company
has more recently begun to develop and
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commercialize the use of a second generation polymer system known generically as
its Novel Degradable Polymer or NDP-system. This system is currently being
developed for the manufacture of OREX Degradables film, composites of film with
nonwoven fabric, and extruded, thermoformed or injection molded solid plastic
items. This NDP family of polymers disperses and then degrades in a processing
step which is initiated by the action of hot water at an elevated pH. The
Company currently obtains its PVA raw materials from various foreign suppliers.
Risks exist in obtaining the quality and quantity of PVA at a price that will
allow the Company to be competitive with manufacturers of conventional
disposable and reusable products. Prevailing prices of PVA have adversely
affected the Company's manufacturing costs for its OREX products. PVA resin from
Japan, Taiwan and certain producers in China are subject to anti-dumping duties
if imported into the United States. See "Risk Factors - Manufacturing and Supply
Risks".
Until 1997, the Company had followed a strategy of capital equipment
purchases and acquisitions to expand and vertically integrate the Company's
manufacturing capabilities, thereby enabling the Company to manufacture and
convert into finished goods many OREX Degradables internally. The Company
acquired OREX material manufacturing plants as a part of this expansion
strategy. In 1998, the Company sold its OREX materials manufacturing plants.
These plants were used by the Company to convert PVA fiber into OREX nonwoven
roll goods and towels. In connection with the sale, the Company sold 4.5 million
pounds of excess PVA fiber at a price of $.45 per pound under an agreement
pursuant to which the Company agreed to repurchase 2.6 million pounds of such
fiber (either as fiber or converted goods) over a four year period at a cost of
$.80 per pound of fiber. Through 2000, the Company has paid $1.2 million for
such fiber. See "Risk Factors - Manufacturing and Supply Risks".
The Company has developed and begun sourcing OREX materials and
Enviroguard fabric using the hydroentangled method of nonwoven roll-good
material manufacturing. This process is neither chemically nor thermally bonded.
Through these roll-good material development and manufacturing efforts, both
domestic and internationally, the Company seeks to reduce the cost of producing
OREX drapes and gowns while simultaneously improving the quality of these
products. The Company currently sources all of these roll goods from outside the
United States. The Company has initially relied on manufacturers in China for
its nonwoven materials and is seeking to reduce its supply risks by sourcing
such materials from manufacturers in other locations. For example, the Company
has recently begun to have manufacturers located in Israel, Italy and North
America supply nonwoven materials.
The Company now relies exclusively on domestic and foreign independent
manufacturers to supply OREX products to the Company's customers. The Company
uses contractors in the People's Republic of China to manufacture OREX sponge
products and spunlaced OREX fabric. The Company has used various independent
parties (both domestically and internationally) to manufacture various OREX
thermoformed, extruded and composite products which have not yet been offered
for commercial sale by the Company. The Company's requirements (which to date
have been modest) for OREX film products are currently being supplied by a
contract manufacturer. The Company has not yet successfully reduced the cost of
manufacturing OREX thermoformed and extruded products and OREX film products to
a sufficient degree to offer such products commercially, although the Company
seeks to use its NDP technology to reduce the cost of manufacturing OREX film
products. See "Risk Factors - Manufacturing and Supply Risks".
The Company manufactures its equipment drapes and fluid control products
at its facilities in Columbus, Mississippi and the Dominican Republic. The
Company utilizes a facility in Jacksonville, Florida as a distribution point for
receipt and shipment of product and for light manufacturing. The Company also
maintains a distribution facility near Manchester, England. In connection with
the Company's acquisition of drape product lines from Deka, the Company acquired
additional leased facilities in Tyler, Texas, Athens, Texas and the Dominican
Republic where it manufactures equipment drapes, and a leased manufacturing and
warehouse facility in Waynesville, North Carolina.
The Company currently relies upon independent manufacturers for the
purchase of materials and components for most of its safety products. The
Company uses, and expects to continue to use, vendors of stock items to the
extent possible to control direct material costs for its safety products. The
Company's safety products production facilities located in Columbus, Mississippi
are used for mixing liquid and powdered chemicals, other light manufacturing and
packaging.
Order Backlog
At December 31, 2000, the Company's order backlog totaled approximately
$473,000 compared to approximately $356,000 (in each case net of any
cancellations) at December 31, 1999. All backlog orders at December 31, 2000 are
expected to be filled prior to year end 2001. Microtek typically sells its
products pursuant to written
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purchase orders which generally may be canceled without penalty prior to
shipment of the product. Accordingly, the Company does not believe that the
level of backlog orders at any date is material or indicative of future results.
Technology and Intellectual Property
The Company seeks to protect its technology by, among other means,
obtaining patents and filing patent applications for technology and products
that it considers important to its business. The Company also relies upon trade
secrets, technical know-how and innovation and market penetration to develop and
maintain its competitive position.
The Company holds several patents issued by the U.S. Patent and
Trademark Office concerning methods of disposing of OREX Degradables, including:
(1) US Patent 5,207,837, issued in 1993 and successfully reexamined (B1
6,207,834) by the U.S. Patent Office in 1996, which covers a method of disposing
OREX materials that are configured into a drape, towel, cover, overwrap, gown,
head cover, face mask, shoe covering, sponge, dressing, tape, underpad, diaper,
wash cloth, sheet, pillow cover, or napkin; (2) US Patent 5,181,967, issued in
1993 and successfully reissued (RE 36399) in 1999, and which covers a method of
disposing particular OREX materials utensils such as procedure trays, laboratory
ware, and patient care items; (3) US Patent 5,181,966, issued in 1993 and
successfully reexamined (B1 5,181,966) in 1996, and which covers a method of
disposing OREX materials configured into packaging materials; and (4) US Patent
No. 6,048,410, issued in 2000, and which covers a method of disposing PVA
garments, linens, drapes and towels.
Isolyser also has several patents which cover particular OREX products,
including (1) US Patent 5,650,219, which was issued in 1995 and covers a method
of disposing particular OREX materials configured into garments, linens, drapes,
and towels; (2) US Patent 5,620,786, issued in 1997 and covers particular OREX
materials that are configured into towels, sponges or gauze; (3) US Patent
5,268,222, issued in 1993 and covers a composite fabric made with an OREX
materials; (4) US Patent 5,885,907, issued in March, 1999, and covers particular
OREX materials configured into a towel, sponge, or gauze; (5) US Patents
5,470,653 and 5,707,731, issued in 1995 and 1998, and which cover mop heads made
from OREX materials; (6) US Patent 5,985,443, issued November, 1999, and which
covers the methods of disposing a mop head; and (7) JP Patent No. 3060180,
issued April, 2000, and which covers mop heads made from OREX materials.
Isolyser also has patents that cover methods of producing OREX brand
products, including: (1) US Patent 5,871,679, issued in February, 1999, and
which covers methods for producing OREX Degradables that are configured into
thermoplastic films and fabrics; (2) US Patent 5,661,217, issued in 1997, which
covers a method of forming molded packaging and utensils from OREX materials and
methods of forming OREX brand films into a packaging, drape, cover, overwrap,
gown, head cover, face mask, shoe cover, CSR wrap, tape, underpad or diaper; (3)
US Patent 5,972,039, issued October, 1999, and which covers methods for
enhancing the absorbency and hand feel of OREX brand fabrics; and (4) US Patent
5,871,679 for producing OREX materials that are configured into film and fabric.
The Company also has several issued patents related to its SMS and LTS
technologies.
The Company currently has several applications pending before the U.S.
Patent and Trademark Office which relate to OREX brand products. Specifically,
those applications concern (i) a new class of OREX biodegradable polymers, (ii)
methods for enhancing the absorbency and hand feel of OREX brand fabrics, (iii)
finishing formulations for OREX materials, (iv) a pipeliner manufactured with
OREX, (v) medical containers made from OREX materials, (vi) a method of
absorbing oil with OREX materials fabric, (vii) PVA fabric that is made from the
spunlace process, including PVA spunlaced fabrics that are configured into
surgical gowns, drapes, and industrial wipes, (viii) wipes made from any PVA
substrate, (ix) equipment covers made from OREX, (x) methods of treating
industrial and medical waste, and (xi) PVA fabrics that are coated on both sides
for greater repellency. The Company is not aware of any facts at this time that
would indicate that patents sought by these applications will not be issued;
however, no assurances can be provided that patents will issue from these
applications. See "Risk Factors - Protection of Technologies."
The Company's U.S. patents expire between 2007 and 2020. The Company
files for foreign counterpart patents on those patents and patent applications
which the Company considers to be material to its business. No assurance can be
given that the various components of the Company's technology protection
arrangements utilized by the Company to protect its technologies, including its
patents, will be successful in preventing others from making
8
products competitive with those offered by the Company, including OREX. See
"Risk Factors-Protection of Technologies".
Under a five-year license agreement from Microban Products Company
entered into on March 22, 1996, Microtek acquired the exclusive right to
incorporate certain antimicrobial additives in the Company's surgical and
equipment drapes manufactured with film and nonexclusive rights to such
additives in non-woven drape products, subject to the payment of royalties and
certain other terms and conditions specified in the license agreement. Microtek
holds a US patent covering a surgical drape having incorporated therein a broad
spectrum antimicrobial agent which expires in 2010. To date, such license and
patent have not been material to the Company's operations.
The Company has registered as trademarks with the U.S. Patent and
Trademark Office "Isolyser," "OREX", "LTS" and "SMS". In addition, the Company
is applying to register the trademark "Enviroguard" in the U.S. Patent and
Trademark Office. Trademark registrations for "Isolyser", "OREX" and "LTS" have
also been granted in various foreign countries. Microtek maintains registrations
of various trademarks which the Company believes are recognized within their
principal markets.
Competition
The markets in which the Company competes are characterized by
competition on the basis of quality, price, product design and function,
environmental impact, distribution arrangements, service, customer relationship,
and convenience. Many of the Company's competitors have significantly greater
resources than the Company. See "Risk Factors - Competition".
Although the Company is not aware of any products currently available in
the market place which provide the same disposal and degradable benefits as OREX
Degradables and Enviroguard, these products compete with traditional disposable
and reusable products currently marketed and sold by many companies. Single use
disposable (as opposed to reusable) drapes and gowns have been available for
over 25 years and according to a 1992 market study account for over 80% of the
surgical market. Competing manufacturers of traditional disposable medical
products are large companies with significantly greater resources than those of
the Company. These competitors have in many instances followed strategies of
aggressively marketing products competitive with OREX Degradables to buying
groups resulting in increasing cost pressures. These factors have adversely
affected the Company's ability to adjust its prices for its OREX products to
take into account disposal cost savings provided by these products, and have
adversely affected the Company's ability to successfully penetrate potential
customer accounts. See "Risk Factors - Marketing Risks affecting OREX Products"
and "- Competition".
The market for the Company's equipment drapes and fluid control products
is also highly competitive, and is dominated by a few large companies such as
Allegiance, Kimberly-Clark Corporation, Johnson & Johnson and 3M Corporation.
Competition for the Company's safety products includes conventional
methods of handling and disposing of medical waste. Contract waste handlers are
competitors which charge premium rates to remove potentially infectious and
hazardous waste and transport it to an incineration or autoclaving site. Many
hospitals utilize their own incinerators to dispose of this waste. In addition,
systems are available that hospitals can purchase for grinding and chemically
disinfecting medical waste at a central location.
The Company believes that its LTS products command a significant share
of a market that thus far has been marginally penetrated. However, the Company
is aware of a variety of absorber products that are directly competitive with
LTS. Recent regulatory developments have placed LTS at a competitive
disadvantage to a competitor's absorber product. See "- Government Regulation".
The Company estimates that it has only a small (less than 5%) market share for
its SMS products. The market niche for disposal of sharps is dominated by a
number of other companies.
Government Regulation
The Company is subject to a number of federal, state and local
regulatory requirements which govern the marketing of the Company's products and
the use, treatment and disposal of these products utilized in the patient care
process. In addition, various foreign countries in which the Company's products
are currently being distributed or may be distributed in the future impose
regulatory requirements. See "Risk Factors - Regulatory Risks".
9
The Company's traditional medical products (including, for example,
equipment drapes), OREX Degradables line of products and SMS products are
regulated by the FDA under medical device provisions of the Federal Food, Drug
and Cosmetic Act (the "FDCA"). FDA regulations classify medical devices into one
of three classes, each involving an increasing degree of regulatory control from
Class I through Class III products. Medical devices in these categories are
subject to regulations which require, among other things, pre-market
notifications or approvals, and adherence to good manufacturing practices,
labeling, record-keeping and registration requirements. Patient care devices
which the Company currently markets are classified as Class I or Class II
devices subject to existing 510(k) clearances which the Company believes satisfy
FDA pre-market notification requirements. The FDA has issued to the Company
510(k) clearances on OREX Degradables products for surgical sponges, operating
room towels, drapes, gowns, surgeon's caps, surgeon's vests, shoe covers and
medical bedding. The Company is currently developing, evaluating and testing
certain OREX Degradables film and thermoformed or extruded OREX products
manufactured from non-PVA polymers, and it is possible that new 510(k)
clearances will be required for such products. There can be no assurances as to
when, or if, other such 510(k) clearances necessary for the Company to market
products developed by it in the future will be issued by the FDA. The FDA
inspects medical device manufacturers and distributors, and has broad authority
to order recalls of medical devices, issue stop sale orders, seize non-complying
medical devices, enjoin violations, impose civil and criminal penalties and
criminally prosecute violators.
The FDA also requires healthcare companies to satisfy record-keeping
requirements and the quality system regulation (QSR) which require that
manufacturers have a quality system for the design and production of medical
devices intended for commercial distribution in the United States. Failure to
comply with applicable regulatory requirements, which may be ambiguous or
unclear, can result in fines, civil and criminal penalties, stop sale orders,
loss or denial of approvals and recalls or seizures of products.
Countries in the European Union require that products being sold within
their jurisdictions obtain a CE mark and be manufactured in compliance with
certain requirements. The Company has CE mark approval to sell its safety and
most of its medical device products in Europe. One of the conditions to
obtaining CE mark status involves the qualification of the Company's
manufacturing plants and corporate offices under certain certification
processes. All of the Company's manufacturing plants and corporate offices have
obtained such certifications, except the domestic manufacturing facilities
acquired from Deka do not hold such certifications. To maintain CE mark
approval, the Company has to satisfy continuing obligations including annual
inspections by European notified bodies as well as satisfy record keeping and
other quality assurance requirements. The notified bodies have the authority to
stop the Company's use of the CE mark if the Company fails to meet these
standards. While the Company believes that its operations at these facilities
are in compliance with requirements to maintain CE mark status, no assurances
are provided that such certifications will be maintained or that other foreign
regulatory requirements will not adversely affect the Company's marketing
efforts in foreign jurisdictions.
Under the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"),
any product which claims to kill microorganisms through chemical action must be
registered with the EPA. Any product that makes a claim that it kills
microorganisms exclusively via a physical or mechanical means is regulated as a
physical "device" under FIFRA. Pesticide devices do not require EPA
registration, but are subject to some requirements, including labeling and
record keeping. FIFRA affects primarily the Company's LTS and SMS products. The
Company believes its SMS product qualifies as a physical disinfecting device
under FIFRA, which permits the Company to advertise that such product physically
disinfects microorganisms without EPA registration. LTS is not registered with
the EPA. The Company has marketed LTS in a manner in which the Company believed
complied with FIFRA by not making claims in product labeling or marketing that
LTS treats or disinfects medical waste or kills microorganisms. In 1998 the EPA
announced its position that FIFRA requires that products, such as LTS, which
hold state approvals related to anti-microbial efficacy, such as state approval
for landfill of LTS-treated waste, impliedly make claims about killing
microorganisms which necessitate registration under FIFRA. The Company continues
to sell its LTS products without FIFRA registration. The Company has altered its
marketing of LTS to comply with EPA's new guidance. In 2000, the Company
obtained registration under FIFRA of a new version of LTS call LTS Plus. The
Company must still seek numerous state and local registrations of such new LTS
Plus products to allow such product to be landfilled in such places. No
assurances can be provided that the Company will obtain such registration or
that prior or continuing sales of the Company's LTS products may not either be
stopped or subject the Company to penalties or other regulatory action. A
product line marketed by a competitor of the Company's LTS products has been
registered under FIFRA, placing LTS at a competitive disadvantage to such
competing product line. See "Risk Factors - Regulatory Risks" and "- Reliance
Upon Distributors".
10
State and local regulations of the Company's products and services is
highly variable. In certain cases, for example, state or local authorizations
are required to landfill Isolyser's SMS or LTS products, or both. In November,
1997, as a result of a review of an existing approval in California for the
landfilling in California of waste treated by LTS, California authorities
revoked such approval. While LTS offers benefits unrelated to landfilling, such
action has adversely affected the Company's ability to sell LTS. The Company is
in the process of obtaining from the various states approval to landfill waste
treated by LTS Plus, and has obtained such approval from several states not
including California. No assurances can be provided that prior regulatory
actions or pending regulatory reviews will not continue to have an adverse
effect upon the sales of the Company's liquid absorbent products. See "Risk
Factors - Reliance Upon Distributors" and "- Regulatory Risks".
State and local sewage treatment plants regulate the sewer discharge,
such as dissolved OREX Degradables, from commercial facilities to the extent
that such discharges may interfere with the proper functioning of sewage
treatment plants. Based on product testing and available research the Company
believes that OREX Degradables manufactured from PVA will not interfere with the
proper functioning of sewage treatment plants. The Company has obtained from
state and local authorities over 100 written and verbal non-binding concurrences
with the Company's conclusions and continues to pursue additional non-binding
concurrences. While the process of obtaining such concurrences is time consuming
and expensive due to the significant number of such authorities and the
educational and testing processes involved, the Company does not believe that
regulations governing sewage and waste water discharges will prevent the use of
OREX Degradables. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX Degradables will not interfere with the
proper functioning of sewage treatment plants.
As the Company seeks to introduce its OREX products to industries other
than healthcare, the Company will be required to satisfy any applicable
regulatory requirements within such industries for the disposal of contaminated
OREX products. While the user of the Company's products and not the Company is
responsible for complying with these legal requirements, the Company's product
development efforts include analyzing compliance programs to facilitate sales of
the Company's products. For example, the Company is currently developing
products and processing technology designed for use in the automotive painting
industry and the nuclear power industry. The processing of OREX materials
contaminated with paint or nuclear outfall is classified as hazardous which
create significant engineering challenges including, for example, a technology
to separate the processed OREX materials from the hazardous component of the
contaminated materials. The Company seeks to work with third parties to develop
technologies to address these challenges. With the help of third parties, the
Company has engineered systems to address these challenges which, based on
preliminary testing, appear to separate the hazardous component of contaminated
OREX material in the processing stage. The Company, however, has not yet begun
commercial sale of these products, which may raise additional challenges as a
part of the Company's efforts to commercialize these technologies.
Regulators at the federal, state and local level have imposed, are
currently considering and are expected to continue to impose regulations on
medical and other waste. No prediction can be made of the potential effect of
any such future regulations, and there can be no assurance that future
legislation or regulations will not increase the costs of the Company's products
or prohibit the sale or use of the Company's products, in either event having an
adverse effect on the Company's business.
Employees
As of December 31, 2000, the Company employed 860 full-time employees,
37 part-time employees and 11 people as independent contractors. Of these, 73
were employed in marketing, sales and customer support, 689 in manufacturing, 23
in research and development, and 122 in administrative positions. The Company
believes its relationship with its employees is good.
Insurance
The Company maintains commercial general liability protection insurance
which provides coverage with respect to product liability claims. The
manufacture and sale of the Company's products entail an inherent risk of
liability. The Company believes that its insurance is adequate in amount and
coverage. There can be no assurance that any future claims will not exceed
applicable insurance coverage. Furthermore, no assurance can be given that such
liability insurance will be available at a reasonable cost or that the Company
will be able to maintain adequate levels of
11
liability insurance in the future. In the event that claims in excess of these
coverage amounts are incurred, they could have a material adverse effect on the
financial condition or results of operations of the Company.
Environmental Matters
The Company is not a party to any material environmental regulation
proceedings alleging that the Company has unlawfully discharged materials into
the environment. The Company does not anticipate the need for any material
capital expenditures for environmental control facilities during the next 18 to
24 months.
Risk Factors
History of Net Losses.
While the Company reported net income for the year ended December 31,
1999, the Company has a history of operating at a net loss. For the year ended
December 31, 2000 and for each of the five years ended December 31, 1998, the
Company incurred net losses. The Company attributes such operating performance
in significant part to a failed strategy to commercialize the Company's OREX
Degradables products. The Company has significantly changed its strategy to
commercialize OREX Degradables. The Company sold $1.6 million of OREX
Degradables products in 2000 and did not realize any gross profit on those
sales. Future investments in OREX Degradables products or failed
commercialization strategies could adversely affect operating results in the
future.
Marketing Risks affecting OREX Products.
Isolyser depends entirely on the efforts and success of Allegiance in
marketing OREX Degradables and Enviroguard products to healthcare markets
because Isolyser granted Allegiance an exclusive worldwide license to these
products in healthcare markets. Allegiance has not yet introduced these products
for commercial sale. If Allegiance does not perform in a manner satisfactory to
Isolyser in marketing these products, Isolyser may nevertheless be required to
await the expiration of that license in April, 2003 or later to pursue an
alternative strategy to commercialize these products in healthcare markets.
While Allegiance is a leading supplier of disposable products to the healthcare
industry, the success of OREX products in the healthcare industry will depend
upon numerous factors and is subject to many risks. In January, 2001, the
Company and Allegiance entered into an agreement suspending any purchase
requirements of Allegiance under the Company's license agreement with Allegiance
pending the resolution of certain developmental challenges and a reevaluation of
the terms by which Isolyser and Allegiance might pursue commercialization of
OREX Degradables and Enviroguard products in healthcare markets.
Similarly, developing a market in non-healthcare industries for OREX is
subject to many risks. These risks include:
. Because Isolyser does not currently sell significant quantities
of OREX products, commercialization of these products will
require the purchaser and user of these products to change their
existing purchasing patterns;
. To realize the full benefits of OREX Degradables products, users
of these products will be required to change the way in which
they dispose of these products by incorporating the OREX
dissolution process in disposal procedures;
. Isolyser may experience difficulties in its objective to provide
a regular supply of adequate quantities of product having
uniformly acceptable performance qualities which may cause
Isolyser to lose customers;
. Isolyser will need to provide appropriate regulatory and
mechanical support to customers to incorporate the processing
technology necessary to degrade OREX Degradables products after
use, and Isolyser may not be able to obtain regulatory approvals
or engineer satisfactory processing technology to support
customers;
. Because Isolyser currently has commercially available only a
limited number of OREX Degradables products and therefore cannot
currently replace all traditional disposable products with OREX
12
Degradables, potential customers may not yet justify large-scale
conversion to OREX Degradables products;
. Past concerns with prior OREX Degradables product performance or
future deficiencies in performance of Isolyser's products may
result in the inability to convert new customers to OREX products
or retain existing customers;
. Long term supply contracts entered into by large hospital chains
and smaller collective buying groups, and corresponding customers
in other industries, may prohibit the successful marketing OREX
Degradables to such customers;
. Competitors may try to sell traditional disposable medical
products at prices which prevent the aggressive marketing and
selling OREX Degradables products; and
. Difficulties may be encountered in obtaining regulatory approvals
necessary to process OREX Degradables.
The Company has no significant experience in marketing OREX Degradables
to industries other than healthcare. In evaluating other industries to develop
and market OREX Degradables products, the Company seeks to identify third
parties which the Company believes have expertise or other strategic
characteristics to help commercialize OREX Degradables in that industry.
Contracting with these third parties may require the Company to grant exclusive
rights to the third party over the OREX technology within the applicable
industry. For example, the Company granted to RJ Hanlon exclusive global
distribution rights to covers manufactured from OREX film for robots used in
automotive painting operations. The license is dated June 14, 1999 and has a
term of three years. If the Company is not satisfied with the performance of RJ
Hanlon, the Company may not be able to cancel the agreement. In addition,
marketing of OREX Degradables products in industries other than the healthcare
industry will encounter the same risks described above for the healthcare
industry. Other industries may have special and additional risks, not currently
known to Isolyser. For example, processing of OREX Degradables used in the
automotive paint industry requires special processing to remove paint as paint
is not permitted to flow into municipal sewer systems.
The Company has not been successful to date in its efforts to obtain
substantial acceptance of its OREX Degradables products in their target markets.
There can be no assurance that the Company's products will achieve or maintain
substantial acceptance in their target markets. In addition to market
acceptance, various factors, including delays in improvements to products and
new product development and commercialization, delays in expansion of
manufacturing capability, new product introductions by competitors, price,
competition, delays in regulatory clearances and delays in expansion of sales
and distribution channels could materially adversely affect the Company's
operations and profitability. See "Business - Products and Markets", "-
Marketing and Distribution", and "- Manufacturing and Supplies", and "Risk
Factors - Manufacturing and Supply Risks".
Manufacturing and Supply Risks.
To relieve itself of the overhead burden associated with owning its own
manufacturing facilities, the Company sold its former OREX manufacturing
facilities and now depends entirely upon third parties to manufacture its OREX
Degradables and Enviroguard products. The Company does not have the ability to
manufacture these products. If the Company is not able to obtain its products
from its manufacturers, if such products do not comply with the specifications
or if the prices at which the Company purchases its products are not competitive
with traditional products, the Company's sales and profits will suffer. The
Company's license with Allegiance requires that it sell Enviroguard fabric to
Allegiance at a fixed cost regardless of costs charged to the Company by its
manufacturers.
The cost for OREX raw materials has been high. The raw material
required to manufacture OREX Degradables woven and non-woven products and
Enviroguard is PVA fiber, and the raw material required to manufacture OREX
Degradables film and thermoformed and extruded items is PVA resin and NDP. The
Company obtains its raw materials from various sources but risks exist in
obtaining the quality and quantity of PVA at a price that will allow the Company
to be competitive with manufacturers of conventional disposable and reusable
products. During 1996, an anti-dumping order was issued which requires that
domestic importers of PVA resin post import bonds or pay cash deposits in the
amount of certain scheduled anti-dumping margins ranging from 19% to 116% of the
raw material cost upon importing such raw materials. These payments are not
required for PVA fiber. Such anti-dumping
13
order may have resulted in increases to the Company's cost for raw materials
over that which might otherwise have prevailed. The prices for these raw
materials have affected the ability of the Company to be price competitive with
conventional disposable and reusable products, both reducing sales and adversely
affecting profits.
The Company has entered into a contract requiring that it purchase
certain minimum quantities of PVA fiber at a fixed price over a four year period
expiring in 2002. The total remaining purchase obligation of the Company under
this contract is $926,000. The failure of the Company to sell adequate
quantities of OREX Degradables products could adversely affect the ability of
the Company to satisfy its obligations under this contract, thereby adversely
affecting the Company's operating results.
The Company does not have significant experience obtaining large,
commercial quantities of OREX Degradables and Enviroguard products to meet its
obligations, and the Company's third party manufacturers have not regularly
manufactured these products in the quantities required for commercial sales. The
Company might have difficulties in receiving adequate quantities of products,
receiving such products on schedule and having such products conform with its
requirements. The Company has entered into a contract with the owner of the
Company's former OREX non-woven roll goods manufacturing facility to supply a
thermobonded version of OREX non-woven roll goods, but does not have a contract
for the continuing supply of OREX Degradables towels. The Company has negotiated
a short-term contract for the continued supply of Enviroguard fabrics from one
supplier in China. The Company does not otherwise maintain contracts with its
suppliers for its OREX Degradables and Enviroguard products. To the extent the
Company does not hold a contract for the supply of its products, the Company may
be at a greater risk in obtaining its products and controlling its costs for
products. Production in China and elsewhere outside the United States exposes
the Company to risks related to currency fluctuations, political instability and
other risks inherent in manufacturing in foreign countries. Certain textiles and
similar products for material (including certain OREX Degradables woven
products) imported from China to the United States are subject to import quotas
which restrict total volume of such items available for import by the Company,
creating risks of limited availability and increased costs for certain OREX
Degradables woven products.
The Company's cost to manufacture OREX Degradables products to date
have not been acceptable. See "Risk Factors - History of Net Losses". There can
be no assurances that the Company will be able to reduce its cost to manufacture
such product. In addition, the Company has various obligations to supply OREX
products at a fixed cost regardless of costs incurred by the Company. For
example, the Company's agreement to supply OREX products to Allegiance provides
for a fixed supply cost. To date, the Company has been unable to manufacture
OREX Degradables film and thermoformed and extruded products at an acceptable
cost. The Company has recently begun to develop the use of new polymers, called
NDP, to test manufacture OREX Degradables film and thermoformed and extruded
products. While the Company has undertaken an evaluation of these new products,
no assurances can be provided that the Company will be successful in
manufacturing on a commercial basis OREX Degradables products from these
polymers or that such products will comply with applicable regulatory
requirements.
The Company's products must be manufactured in compliance with FDA and
other regulatory requirements while maintaining product quality at an acceptable
manufacturing cost. There can be no assurance that manufacturing or quality
control problems will not arise at manufacturing plants used to supply the
Company's products, or that the Company's manufacturers will be able to maintain
the necessary licenses from governmental authorities to continue to manufacture
OREX Degradables products.
The Company has from time to time experienced delays in manufacturing
certain OREX Degradables products. The Company has also from time to time
encountered dissatisfaction with certain quality or performance characteristics
of its products. These delays and quality or performance issues have resulted in
the loss of customers. There can be no assurance that future delays or quality
concerns will not occur or that past customer relations on these products will
not adversely affect future customer relations and operating results.
The Company is continually in the process of making improvements to its
technologies and systems for manufacturing its OREX Degradables products, while
simultaneously marketing and supplying various of these products. From time to
time, the Company has invested in inventory of certain OREX Degradables products
which subsequently have been rendered obsolete by improvements in manufacturing
technologies and systems. There can be no assurances that possible future
improvements in manufacturing processes or products will not render other
inventories of product obsolete, thereby adversely affecting the Company's
financial statements.
14
The production of the Company's products is based in part upon
technology that the Company believes to be proprietary. The Company has provided
this technology to contract manufacturers, on a confidential basis and subject
to use restrictions, to enable them to manufacture products for the Company.
There can be no assurance that such manufacturers or other recipients of such
information will abide by any confidentiality or use restrictions.
Protection of Technologies.
The Company's success will depend in part on its ability to protect its
technologies. The Company relies on a combination of trade secret law,
proprietary know-how, non-disclosure and other contractual provisions and
patents to protect its technologies. Failure to adequately protect its patents
and other proprietary technologies, including particularly the Company's
intellectual property concerning its OREX Degradables, could have a material
adverse effect on the Company and its operations. The Company holds various
issued patents and has various patent applications pending relative to its OREX
Degradables products. See "Business - Technology and Intellectual Property".
Although management believes that the Company's patents and patent
applications provide or will provide adequate protection, there can be no
assurance that any of the Company's patents will prove to be valid and
enforceable, that any patent will provide adequate protection for the
technology, process or product it is intended to cover or that any patents will
be issued as a result of pending or future applications. Failure to obtain the
patents pursuant to the Company's patent applications could have a material
adverse effect on the Company and its operations. It is also possible that
competitors will be able to develop materials, processes or products, including
other methods of disposing of contaminated waste, outside the patent protection
the Company has or may obtain, or that such competitors may circumvent, or
successfully challenge the validity of, patents issued to the Company. Although
there is a statutory presumption of a patent's validity, the issuance of a
patent is not conclusive as to its validity or as to the enforceable scope of
the claims of the patent. In the event that another party infringes the
Company's patent or trade secret rights, the enforcement of such right is
generally at the option of the Company and can be a lengthy and costly process,
with no guarantee of success. Further, no assurance can be given that the
Company's other protection strategies such as confidentiality agreements will be
effective in protecting the Company's technologies. Due to such factors, no
assurance can be given that the various components of the Company's technology
protection arrangements utilized by the Company, including its patents, will be
successful in preventing other companies from making products competitive with
those offered by the Company, including OREX Degradables.
Although to date no claims have been brought against the Company
alleging that its technology or products infringe upon the intellectual property
rights of others, there can be no assurance that such claims will not be brought
against the Company in the future, or that any such claims will not be
successful. If such a claim were successful, the Company's business could be
materially adversely affected. In addition to any potential monetary liability
for damages, the Company could be required to obtain a license in order to
continue to manufacture or market the product or products in question or could
be enjoined from making or selling such product or products if such a license
were not made available on acceptable terms. If the Company becomes involved in
such litigation, it may require significant Company resources, which may
materially adversely affect the Company. See "Business - Technology and
Intellectual Property".
Competition.
To date, substantially all of the Company's sales have been to the
healthcare industry. The healthcare industry is highly competitive. There are
many companies engaged in the development, manufacturing and marketing of
products and technologies that are competitive with the Company's products and
technologies. Many such competitors are large companies with significantly
greater financial resources than the Company. Sellers and purchasers of medical
products have undergone consolidations in recent years, resulting in increasing
concentration of the market for disposable medical products with a few companies
and increasing cost pressures. This industry trend may place the Company at a
competitive disadvantage. The Company believes that these trends have adversely
affected the Company's ability to adjust its prices for its OREX Degradables
products to take into account disposal cost savings provided by such products,
in addition to adversely affecting the Company's ability to successfully
penetrate potential customer accounts. The market for disposable medical
products is very large and important to the Company's competitors. Certain of
the Company's competitors serve as the sole distributor of products to a
significant number of hospitals.
15
The Company seeks to sell its OREX Degradables products to industries
other than healthcare, and the Company has virtually no presence in these other
industries at this time. Therefore, the Company will be required to displace
sales of competitive products in these other industries to gain market presence.
There can be no assurance that the Company's competitors will not substantially
increase the resources devoted to the development, manufacturing and marketing
of products competitive with the Company's products. The successful
implementation of such strategy by one or more of the Company's competitors
could have a material adverse effect on the Company. See "Business -
Competition".
Risks of Technological Obsolescence.
Many companies are engaged in the development of products and
technologies to address the need for safe and cost-effective disposal of
potentially infectious and hazardous waste. There can be no assurance that
superior disposal technologies will not be developed or that alternative
approaches will not prove superior to the Company's products. The Company's
products could be rendered obsolete by such developments, which would have a
material adverse effect on the Company's operations and profitability.
Reliance Upon Distributors.
The Company has historically relied on large distributors for the
distribution of its products. Hospitals purchase most of their products from a
few large distributors. Of these distributors, only Allegiance accounted for
more than 10% of the Company's total sales during 2000. If the efforts of the
Company's distributors prove unsuccessful, or if such distributors abandon or
limit their distribution of the Company's products, the Company's sales may be
materially adversely affected. Recent regulatory developments regarding the
Company's LTS products described under "Business - Government Regulation" may
have caused Allegiance to substantially reduce its purchases of the Company's
existing LTS products. The Company believes that Allegiance may have begun to
purchase products competitive with those of LTS manufactured by a third party
which have been registered with the Environmental Protection Agency. Until 1996,
Allegiance was the sole distributor for the Company's LTS products and remains
the most significant distributor of such products. Reduction of such purchases
by Allegiance has had a material adverse effect upon the Company's operating
results. Purchases of all products by Allegiance from Microtek during 2000
represented 16.2% of Microtek's 2000 net sales. The relationships between the
Company and Allegiance with regard to LTS and the Company's infection control
products, as well as the license granted to Allegiance for OREX products, make
the Company substantially dependent upon Allegiance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Regulatory Risks.
The development, manufacture and marketing of the Company's products
are subject to extensive government regulation in the United States by federal,
state and local agencies including the EPA, the FDA and state and local sewage
treatment plants. Similar regulatory agencies exist in other countries with a
wide variety of regulatory review processes and procedures, concerning which the
Company relies to a substantial extent on the experience and expertise of local
product dealers, distributors or agents to ensure compliance with foreign
regulatory requirements. The process of obtaining and maintaining FDA and any
other required regulatory clearances or approvals of the Company's products is
lengthy, expensive and uncertain, and regulatory authorities may delay or
prevent product introductions or require additional tests prior to introduction.
The FDA has issued to the Company 510(k) clearances on OREX Degradables products
for surgical sponges, operating room towels, drapes, gowns, surgeon's caps,
surgeon's vests, shoe covers and medical bedding. The Company is currently
developing, evaluating and testing certain OREX Degradables film and
thermoformed or extruded OREX products manufactured from non-PVA polymers, and
it is possible that new 510(k) clearances will be required for such products.
There can be no assurance as to when, or if, other such 510(k) clearances
necessary for the Company to market products developed by it in the future will
be issued by the FDA. The FDA also requires healthcare companies to satisfy the
quality system regulation. Failure to comply with applicable regulatory
requirements, which may be ambiguous or unclear, can result in fines, civil and
criminal penalties, stop sale orders, loss or denial of approvals and recalls or
seizures of products. There can be no assurance that changes in existing
regulations or the adoption of new regulations will not occur, which could
prevent the Company from obtaining approval for (or delay the approval of)
various products or could affect market demand for the Company's products.
16
Developments regarding the Company's LTS products have had and could
continue to have a material adverse effect upon the Company's operating results.
In November, 1997, the State of California revoked its approval for direct
landfill disposal (without sterilization) of LTS-treated waste within such
state. In February 1998 EPA announced a new policy that FIFRA requires that
products, such as LTS, which hold state approvals related to anti-microbial
efficacy, such as state approvals for landfill of LTS-treated waste, impliedly
make claims about killing microorganisms which would require that LTS be
registered under FIFRA. LTS has not been registered under FIFRA and, based in
part on meetings by the Company with the EPA, the Company continues to sell LTS
without such registration. The Company now is marketing LTS without relying upon
any state approvals for direct landfill disposal. In 2000, the Company obtained
registration under FIFRA by the EPA of a new version of LTS called LTS Plus. The
Company must still seek numerous state and local registrations of LTS Plus to
allow such product to be landfilled in such places. The EPA's change in policy
could cause the Company to become subject to an order to stop sales of the
original version of LTS or be subject to fines, penalties or other regulatory
enforcement procedures, any one or more of which could have a material adverse
effect on the Company and its results of operations.
Users of OREX Processors may be subject to regulation by local sewage
treatment plants to the extent that discharges from OREX Processors may
interfere with the proper functioning of such plants. In the Company's license
of OREX Degradables products to Allegiance, the Company has agreed to seek
regulatory approval for the disposal of OREX Degradables by the sanitary sewer
systems in the United States and Canada, the European Community countries and
Japan. If Isolyser fails to obtain such approvals within certain specific
territories within certain specified time frames, Allegiance's minimum purchase
obligation under the license will be reduced. The Company has approached
numerous sewage treatment plants requesting their approval to dispose of OREX
Degradables through the municipal sewer system. Although the Company has
obtained a total of over 100 non-binding written and verbal concurrences from
sewage treatment plants, certain of the founder hospitals and other hospitals
who have indicated an interest in purchasing OREX Degradables and an OREX
Processor are located in municipalities where such approvals have not been, and
may never be, obtained. While the Company is undertaking evaluation of OREX
Degradables manufactured from polymers other than PVA, no assurances can be
provided that such non-PVA based OREX products will not interfere with the
proper functioning of sewage treatment plants thereby adversely affecting the
Company's ability to successfully commercialize such newly developing OREX
Degradables technology. There can be no assurance that disposal of OREX
Degradables in areas where these approvals have not been granted will not result
in fines, penalties or other sanctions against product users or adversely affect
market demand for the Company's products.
Introduction of the Company's OREX Degradables products into
non-healthcare industries will require compliance with additional regulatory
requirements. While the Company seeks to engage the services of companies having
expertise in engineering systems to comply with these regulatory requirements,
the Company may not be able to develop satisfactory solutions to regulatory
requirements at an acceptable cost. Until the Company commences commercial sales
of products, the Company may not be able to anticipate all requirements to
successfully commercialize OREX Degradables in these other industries.
Accordingly, no assurances can be provided that OREX Degradables will be an
attractive product to non-healthcare industries.
Environmental Matters.
The Company is subject to various federal, state, local and foreign
environmental laws and regulations governing the discharge, storage, handling
and disposal of a variety of substances and waste used in or generated by the
Company's operations. There can be no assurance that environmental requirements
will not become more stringent in the future or that the Company will not incur
substantial costs in the future to comply with such requirements or that future
acquisitions by the Company will not present potential environmental
liabilities.
Healthcare Reform.
The federal government and the public have focused considerable
attention on reforming the healthcare system in the United States. The Company
cannot predict the healthcare reforms that ultimately may be enacted nor the
effect any such reforms may have on its business. No assurance can be given that
any such reforms will not have a material adverse effect on the Company.
Product Liability.
The manufacture and sale of the Company's products entail an inherent
risk of liability. Product liability claims may be asserted against the Company
in the event that the use of the Company's products are alleged to have
17
resulted in injury or other adverse effects, and such claims may involve large
amounts of alleged damages and significant defense costs. Although the Company
currently maintains product liability insurance providing coverage for such
claims, there can be no assurance that the liability limits or the scope of the
Company's insurance policy will be adequate to protect against such potential
claims. In addition, the Company's insurance policies must be renewed annually.
While the Company has been able to obtain product liability insurance in the
past, such insurance varies in cost, is difficult to obtain and may not be
available on commercially reasonable terms in the future, if it is available at
all. A successful claim against the Company in excess of its available insurance
coverage could have a material adverse effect on the Company. In addition, the
Company's business reputation could be adversely affected by product liability
claims, regardless of their merit or eventual outcome. See "Business -
Insurance".
Dependence on Key Personnel.
The Company believes that its ability to succeed will depend to a
significant extent upon the continued services of a limited number of key
personnel, and the ability of the Company to attract and retain key personnel.
The loss of the services of any one or more of these individuals or the failure
to attract and retain such individuals could have a material adverse effect upon
the Company.
Anti-Takeover Provisions.
On December 19, 1996, the Company's Board of Directors adopted a
Shareholder Protection Rights Agreement (the "Rights Agreement"). Under the
Rights Agreement, a dividend of one right ("Right") to purchase a fraction of a
share of a newly created class of preferred stock was declared for each share of
common stock outstanding at the close of business on December 31, 1996. The
Rights, which expire on December 31, 2006, may be exercised only if certain
conditions are met, such as the acquisition (or the announcement of a tender
offer the consummation of which would result in the acquisition) of beneficial
ownership of 15 percent or more of the common stock ("15% Acquisition") of the
Company by a person or affiliated group. The Rights, if exercised, would cause
substantial dilution to a person or group of persons that attempts to acquire
the Company without the prior approval of the Board of Directors. The Board of
Directors may cause the Company to redeem the Rights for nominal consideration,
subject to certain exceptions. The Rights Agreement may discourage or make more
difficult any attempt by a person or group of persons to obtain control of the
Company.
ITEM 2. PROPERTIES
The Company maintains approximately 32,000 square feet of office,
manufacturing, production, research and development and warehouse space located
in Norcross, Georgia under a lease which expires December 30, 2001. The Company
consolidated its administrative offices to this Norcross facility during 1998 in
connection with the sale of its former administrative offices. The Company also
leases from a local economic development authority a 13,300 square foot
administrative building located in Columbus, Mississippi under a lease which
expires December 31, 2007.
The Company conducts its equipment drape and fluid control
manufacturing business from three locations. In Columbus, Mississippi the
Company owns an 80,000 square foot manufacturing building and leases on a
month-to-month basis a 25,000 square foot warehouse facility. The Company leases
four manufacturing facilities totaling 59,000 square feet located in the
Dominican Republic which expire at various dates through 2007. The Company
leases a 43,000 square foot facility located in Empalme, Mexico, where it
manufactures equipment drape and fluid control products. The current lease has
expired on this facility and it is being leased on a month to month basis
through May 2001 when the facility will be closed. The Company leases a 35,000
square foot facility in Tyler, Texas where it manufactures equipment drapes
under a lease which expires July 31, 2002, subject to two renewal options for
five years each. The Company leases a 5,000 square foot manufacturing facility
in Athens, Texas where it manufactures equipment drapes under a lease that
expires on April 1, 2004. The Company also leases a 7,000 square foot
manufacturing and warehouse facility in Waynesville, North Carolina where it
produces prototypes of surgical drapes under a lease that expires on October 1,
2001.
The Company also leases approximately 69,000 square feet of warehouse
and distribution space in Jacksonville, Florida. The Company uses this facility
for distribution of finished products, distribution of materials to the
Company's Dominican Republic facility and light manufacturing under a lease
expiring April 30, 2003.
Through a subsidiary, the Company leases approximately 9,000 square
feet of space near Manchester, England, approximately 7,000 of which is used for
warehouse space and 2,000 of which is used for office space.
18
The Company believes that its present facilities are adequate for its
current requirements.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation and legal
proceedings in the ordinary course of business. Such litigation and legal
proceedings have not resulted in any material losses to date, and the Company
does not believe that the outcome of any existing lawsuits will have a material
adverse effect on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of the Company's
shareholders during the three months ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock is traded and quoted on The Nasdaq Stock Market under
the symbol "OREX". The following table shows the quarterly range of high and low
sales prices of the common stock during the periods indicated since December 31,
1998.
Common Stock
Quarter Ended High Low
------------- ---- ---
2000
First Quarter $6.97 $2.88
Second Quarter $5.47 $3.00
Third Quarter $3.50 $1.88
Fourth Quarter $2.47 $0.50
1999
First Quarter $3.25 $1.06
Second Quarter $5.00 $2.28
Third Quarter $4.94 $3.13
Fourth Quarter $4.00 $2.31
On March 16, 2001, the closing sales price for the common stock as
reported by The Nasdaq Stock Market was $0.875 per share.
As of March 16, 2001, the Company had approximately 18,430
shareholders, including approximately 1,430 shareholders of record and 17,000
persons or entities holding the Company's common stock in nominee name.
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. Moreover, the Company's
credit facility prohibits the Company from declaring or paying cash dividends
without the prior written consent of its lenders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". Accordingly, the Company does not intend to pay cash
dividends in the foreseeable future.
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth summary historical financial data for
each of the five years in the period ended December 31, 2000. In April, 1996,
Microtek purchased the Venodyne division of Advanced Instruments, Inc., and the
Company's results of operations include the results of Venodyne only from the
April 27, 1996 acquisition date. Additionally, during 1999 the Company disposed
of substantially all of the assets of its MedSurg subsidiary and all of its
capital stock in its White Knight subsidiary, and during 1998 the Company
disposed of its Arden and Charlotte, North Carolina and Abbeville, South
Carolina manufacturing facilities, its industrial and Struble & Moffitt
divisions of
19
its White Knight subsidiary, and substantially all of the net assets of its
SafeWaste subsidiary. In October, 2000, Microtek acquired the urology drape
product line of Lingeman Medical Products, Inc. The summary historical financial
data should be read in conjunction with the historical consolidated financial
statements of the Company and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data appearing elsewhere in this Form 10-K. The summary
historical financial data for each of the five years in the period ended
December 31, 2000 has been derived from the Company's audited consolidated
financial statements.
Year Ended December 31,
1996 1997 1998 1999 2000
Statement of Operations Data:
(in thousands, except per share data)
Net sales................................... $ 164,906 $ 159,940 $ 147,643 $ 97,554 $ 53,931
Licensing revenues.......................... - - - 1,500 2,433
----------- ------------- -------------- ------------- -------------
Total revenues........................ 164,906 159,940 147,643 99,054 56,364
Cost of goods sold.......................... 128,598 142,094 109,936 61,970 35,938
----------- ------------- -------------- ------------- -------------
Gross Profit.......................... 36,308 17,846 37,707 37,084 20,426
Operating expenses
Selling, general and
administrative........................ 41,381 43,422 40,182 26,596 21,246
Research and development.............. 2,173 2,601 3,906 3,724 4,098
Amortization of intangibles........... 4,290 3,847 2,052 1,440 1,780
Impairment charge..................... - 57,310 7,445 769 -
Restructuring charge.................. 4,410 - - - 1,555
Costs associated with merger.......... 3,372 - - -
Gain on dispositions.................. - - - (628) (21)
----------- ------------- -------------- ------------- -------------
Total operating expenses........... 55,626 107,180 53,585 31,901 28,658
----------- ------------- -------------- ------------- -------------
(Loss) income from operations..... (19,318) (89,334) (15,878) 5,183 (8,232)
Net other income (expense).................. (1,316) (3,415) (3,223) (1,195) (3,755)
----------- ------------- -------------- ------------- -------------
(Loss) income before tax, extraordinary
items and cumulative effect of change
in accounting principle.................. (20,634) (92,749) (19,101) 3,988 (11,987)
Income tax provision (benefit).............. (639) 354 540 1,291 155
----------- ------------- -------------- ------------- -------------
(Loss) income before extraordinary items
and cumulative effect of change in
accounting principle..................... (19,995) (93,103) (19,641) 2,697 (12,142)
Extraordinary items (1)..................... 457 - (1,404) - -
Cumulative effect of change
in accounting principle (2).............. - 800 - - -
----------- ------------- -------------- ------------- -------------
Net (loss) income........................ $ (20,452) $ (93,903) $ (18,237) $ 2,697 $ (12,142)
=========== ============= ============== ============= =============
Net (loss) income per share - Basic and Diluted
(Loss) income before extraordinary
item and cumulative effect of
change in accounting principle........ $ (0.52) $ (2.37) $ (0.49) $ 0.07 $ (0.29)
Extraordinary items................... (0.01) - 0.04 - -
Cumulative effect of change in
accounting principle.................. - (0.02) - - -
----------- ------------- -------------- ------------- -------------
Net (loss) income per share - Basic and
Diluted.................................. $ (0.53) $ (2.39) $ (0.45) $ 0.07 $ (0.29)
=========== ============= ============== ============= =============
Weighted average number of common and
common equivalent shares outstanding
- basic.................................. 38,763 39,273 39,655 40,318 41,269
Weighted average number of common and
common equivalent shares outstanding
- diluted................................ 38,763 39,273 39,655 41,158 43,221
20
(1) Gives effect to the gain from the extinguishment of debt in 1998 and
the loss from refinancing of Isolyser's and Microtek's credit
facilities, net of tax benefits of $332 in 1996.
(2) Reflects the adoption of Emerging Issues Task Force ("EITF") Consensus
No. 97-13, "Accounting for Costs in Connection with a Consulting
Contract or an Internal Process that Combines Processing Reeingineering
and Information Technology Costs Transformation."
Year Ended December 31,
------------------------------------------------------------------------------
1996 1997 (1) 1998 (2) 1999 2000
Balance Sheet Data:
(in thousands)
Working Capital...................... $ 91,962 $ 72,408 $ 39,124 $ 44,090 $ 34,372
Intangible assets, net............... 57,331 30,803 29,128 23,071 23,057
Total assets......................... 250,935 144,334 109,518 95,339 76,969
Long-term debt....................... 47,029 37,546 19,376 4,059 1,673
Total shareholders' equity........... 178,804 86,117 68,675 74,722 63,598
(1) Pursuant to SFAS No. 121 the Company classified $35.8 million of net
assets related to its OREX manufacturing facilities and White Knight
subsidiary as held for sale, and included such amount in current
assets.
(2) Pursuant to SFAS No. 121 the Company classified $9.9 million of net
assets related to its White Knight subsidiary and its former
headquarters building as held for sale, and included such amounts in
current assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company was incorporated in 1987 and commenced operations in 1988
with the introduction of its SMS products. In 1990, the Company introduced its
LTS products and thereafter introduced others of its safety products and
services. During 1993, the Company completed the acquisition of two procedure
tray businesses and began to sell standard and custom procedure trays.
On July 1, 1995, Microtek acquired the infection control drape line of
Xomed, in exchange for Microtek's otology product line, thereby providing
Microtek greater concentration on its core business. On September 1, 1995,
Isolyser acquired White Knight and began the conversion manufacturing of
non-woven fabric into finished goods such as drapes and gowns. On November 30,
1995, Microtek acquired Medi-Plast, a manufacturer of equipment drapes.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., which manufactures and markets pneumatic pumps and disposable
compression sleeves for use in reducing deep vein thrombosis, and the Company's
results of operations include the results of Venodyne only from the April 27,
1996 acquisition date. Effective September 1, 1996, Isolyser completed its
merger with Microtek, which was accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated for all
periods to combine the financial statements of each of Isolyser and Microtek.
In March 1998, the Company announced a plan to dispose of its OREX
manufacturing facilities and its White Knight subsidiary. In August 1998, the
Company disposed of its Arden and Charlotte, North Carolina OREX manufacturing
facilities, and substantially all of the net assets of the industrial division
of its White Knight subsidiary and its SafeWaste subsidiary. In 1998 the Company
disposed of the Struble & Moffitt division of its White Knight subsidiary. In
October 1998, the Company disposed of its Abbeville, South Carolina OREX
manufacturing facility. The Company maintains a 19.5% minority interest in the
company formed to own and operate the Abbeville and Arden facilities. In 2000,
the Company wrote off this investment in its entirety.
On March 31, 1999, the Company disposed of its former corporate
headquarters in Norcross, Georgia. Effective May 31, 1999, the Company disposed
of the stock of its White Knight subsidiary. On July 12, 1999, the Company sold
substantially all of the assets of MedSurg to Allegiance and granted to
Allegiance an exclusive worldwide license to the Company's proprietary
technologies to manufacture, use and sell products made from material which can
be dissolved and disposed of through sanitary sewer systems for healthcare
applications. In October, 2000, Microtek acquired the urology drape product line
of Lingeman Medical Products, a former customer of Microtek.
21
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net revenues for 2000 were $56.4 million compared to $99.1 million for
1999, a decline of 43.1%. Excluding sales of businesses sold during 1999, net
revenues in 2000 decreased 6.7% from net revenues in 1999. Sales of Microtek
products decreased 11.4% to $44.2 million during 2000 as compared to $49.8
million during 1999. This decrease was primarily a result of increased sales in
1999 from a short-term manufacturing contract arrangement with Allegiance.
Excluding this non-recurring business, Microtek sales increased 0.8% from $43.8
million in 1999 to $44.2 million in 2000. Microtek's acquisition of the urology
drape product line of Lingeman Medical Products did not have a material impact
on Microtek's operating results because Lingeman Medical Products was formerly
an OEM private label customer of Microtek. Sales of the Company's safety
products decreased 4.6% from $8.3 million in 1999 to $7.9 million in 2000. This
decrease was due to continuing reduction in purchases of safety products by
Allegiance during 2000.
Included in 2000 revenues are $2.4 million of licensing revenue
associated with the amortization of $10.5 million payment by Allegiance
allocated to the Company's Supply and License Agreement with Allegiance and $1.6
million in sales of OREX and Enviroguard products during 2000. Sales of OREX
Degradables in 2000 did not contribute any gross profit to the Company's
operating results. The license fee amortization was reduced proportionately by
the settlement of indemnification claims by Allegiance and other adjustments
totaling $3.5 million, of which $2.5 million was satisfied by the application of
funds in escrow. The Company's ability to successfully manufacture, supply and
expand its OREX Degradables line of products at acceptable profit margins
remains subject to risks. See "Risk Factors - History of Net Losses", "-
Marketing Risks Affecting OREX Products" and "-Manufacturing and Supply Risks".
During 2000 sales of the Company's safety products continued to be
materially adversely affected by the substantial reduction in purchases of LTS
products by the Allegiance division of Cardinal Healthcare, the largest
distributor of such products, and the previously reported adverse regulatory
developments related to the change in policy by the EPA requiring registration
of the new LTS-Plus product prior to its introduction into the market. This
policy change by EPA also forced the withdrawal of all landfill approvals for
conventional LTS products in mid-1998. LTS-Plus, the new generation treatment
product, has now been registered by the EPA as a treatment for liquid medical
waste and subsequent approvals for direct landfill disposal have been issued by
many states. The Company introduced LTS-Plus into the market during the first
quarter of 2001. See "Risk Factors - Reliance Upon Distributors" and
"-Regulatory Risks".
Gross profit for 2000 was $20.4 million or 36.2% of net revenues
compared to $37.1 million or 37.4% of net revenues in 1999. Excluding gross
profits from the amortization of licensing revenues, gross margin was 33.4% in
2000 as compared to 36.5% in 1999. Included in cost of goods sold in 2000 was a
charge of $3.5 million related to increased reserves for excess and obsolete
OREX inventories, with no similar expense in 1999.
Selling, general and administrative expenses were $21.2 million or
37.7% of net sales in 2000 as compared to $26.6 million or 26.9% of net sales in
1999. This decrease in absolute dollar expenses is due to operations sold during
the year partially offset by a $3.2 million increase in these expenses incurred
by the Company's continuing operations. Expense categories with significant
increases include legal, audit and tax services, consulting and investor
relations. Additionally, the Company incurred higher distribution freight
expense due to rising fuel cost.
Research and development expenses were $4.1 million in 2000 as compared
to $3.7 million in 1999. Included in the increased R&D expenditures were costs
for accelerated development of manufacturing and subsequent fabrication
technologies for the Company's line of Enviroguard products for healthcare. The
Company also experienced unplanned expenditures for the design and development
of its OREX processing units following the default of a vendor for the
fabrication of such units.
Amortization of intangibles was $1.8 million or 3.2% of net sales in
2000. This compares to $1.4 million or 1.5% of net sales in 1999. The increase
in 2000 is primarily due to the write-off of intangibles that related to
operations that were disposed of.
The Company recorded operating expense restructuring charges during
2000 of $1.6 million compared to $769,000 of impairment charges in 1999.
Included in the 2000 charges were severance payments to former officers and
employees, write-offs related to consulting arrangements, write-off of lease
payments for closed offices and the impairment of equipment. The 1999 impairment
charges were attributed to the disposition of the Company's
22
interests in its White Knight subsidiary of $1.6 million partially offset by a
$821,000 adjustment of a previous impairment charge associated with the 1998
sale of its White Knight industrial business.
A loss from operations in 2000 of $8.2 million compares with income
from operations in 1999 of $5.2 million. Without the restructuring charges and
provision for excess and obsolete OREX inventories described above, the Company
would have reported a loss from operations in 2000 of $3.2 million.
Interest income, net of interest expense, in 2000 was $349,000 compared
to net interest expense of $1.2 million in 1999. The decline in interest expense
is primarily attributable to the elimination of the Company's outstanding
balance in its revolver and term loan facility from proceeds of divestitures.
The Company has decided to discontinue additional investment in Thantex
Specialties and has concluded that the recovery of the investment is unlikely.
Accordingly, the investment was written off in 2000.
Provision for income taxes was $155,000 for 2000 compared to $1.3
million in 1999. The 2000 income tax provision is comprised primarily of state
and foreign income taxes.
The resulting net loss for 2000 was $12.1 million compared to net
income of $2.7 million in 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net revenues for 1999 were $99.1 million compared to $147.6 million for
1998, a decline of 32.9%. Excluding sales of businesses sold during 1998 or
1999, net sales in 1999 increased 21.2% over net revenues in 1998. Sales of
Microtek products increased to $49.8 million during 1999 as compared to $42.1
million during 1998, an increase of 18.4%. This increase was primarily a result
of new business from a short-term manufacturing contract arrangement with
Allegiance. Sales of the Company's safety products were 4.3% lower in 1999 than
1998. This decrease was due to continuing reduction in purchases of safety
products by Allegiance during portions of 1998 and 1999.
Included in 1999 revenues are $1.5 million of licensing revenue
associated with the amortization of $10.5 million payment by Allegiance
allocated to the Company's Supply and License Agreement with Allegiance and $1.7
million in sales of OREX Degradables and Enviroguard during 1999. Sales of OREX
Degradables in 1999 did not contribute any gross profits to the Company's
operating results. The Company's ability to successfully manufacture, supply and
expand its OREX Degradables line of products at acceptable profit margins
remains subject to risks. See "Risk Factors - History of Net Losses", "-
Marketing Risks Affecting OREX Products" and "-Manufacturing and Supply Risks".
Gross profit for 1999 was $37.1 million or 37.4% of net revenues
compared to $37.7 million or 25.5% of net revenues in 1998. In June, 1999 the
Company recorded an adjustment to cost of sales and inventory, providing for an
increase in the valuation of inventory and a corresponding reduction in cost of
sales of $1.6 million.
Selling, general and administrative expenses were $26.6 million or
26.9% of net sales in 1999 as compared to $40.2 million or 27.2% of net sales in
1998. This decrease in absolute dollar expenses is due to operations sold during
the year partially offset by a $1.5 million increase in these expenses incurred
by the Company's continuing operations.
Research and development expenses were $3.7 million or 3.8% of net
sales in 1999 as compared to $3.9 million or 2.6% of net sales in 1998. The
Company initiated a re-engineering of the OREX Degradables products in 1998
which was completed in late 1998. The completion of the re-engineering of OREX
to produce Enviroguard in 1998 and reduced costs associated with the development
of a new LTS product accounted for the decline in expenditures in 1999 compared
to 1998.
Amortization of intangibles was $1.4 million or 1.5% of net sales in
1999. This compares to $2.1 million or 1.4% of net sales in 1998. The decrease
in 1999 is primarily due to operations sold during the year.
The Company recorded impairment and other charges during 1999 of
$769,000 compared to $7.4 million of impairment charges in 1998. The 1999
impairment charges were attributed to the disposition of the Company's interests
in its White Knight subsidiary of $1.6 million partially offset by a $821,000
adjustment of a previous
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impairment charge associated with the 1998 sale of its White Knight industrial
business. 1998 charges related to the disposition of the Company's White Knight
industrial business, and the excess carrying values of the Company's White
Knight subsidiary and the Company's former headquarters over their respective
fair values.
Income from operations in 1999 of $5.2 million compares with a loss
from operations in 1998 of $15.9 million.
Interest expense, net of interest income, in 1999 was $1.2 million
compared to $3.2 million in 1998. The decline is primarily attributable to the
elimination of the Company's outstanding balance in its revolver and term loan
facility from proceeds of divestitures.
Provision for income taxes was $1.3 million for 1999 compared to
$540,000 in 1998. The 1999 income tax provision is comprised primarily of state
and foreign income taxes.
The Company recorded a $1.4 million gain from the extinguishment of
debt during 1998 related to a purchase agreement with a former customer.
The resulting net income for 1999 was $2.7 million compared to a 1998
net loss of $18.2 million.
Liquidity and Capital Resources
As of December 31, 2000, the Company's cash and cash equivalents
totaled $14.4 million compared to $17.0 million at December 31, 1999. As of
December 31, 2000, the Company held a $200,000 escrow deposit included in other
assets which was subsequently used to purchase certain assets of MicroBasix
related to OTI's nuclear business.
During 2000, the Company utilized cash to finance the purchase of a
business, property and equipment, to make scheduled debt repayments related to
previous acquisitions of businesses, equipment and capital leases, and to fund
working capital requirements. For 2000, net cash used in operating activities
was $1.7 million; net cash provided by investing activities was $541,000; and
net cash used in financing activities was $1.3 million. The $1.7 million used in
operating activities in 2000 results principally from the operating loss, but is
offset by significant decreases in inventories and prepaid expenses.
Contributing to the use of cash were the decreases in accounts payable, accrued
compensation and other liabilities. During 2000, cash used in investing
activities included $1.1 million in capital property and equipment expenditures
as compared to $1.3 million in 1999. These expenditures were primarily
associated with investments to improve the Company's internal management
information systems. Also during 2000, the Company purchased a portion of the
assets of Lingeman Medical Products, Inc. for $1.8 million, consisting of $1.1
million in cash and a $675,000 note. The Company also invested $249,000 in
Consolidated EcoProgress and $44,000 in Global Resources, Inc. Cash used in
financing activities was approximately $1.3 million in 2000 as compared to $23.3
million in 1999. In 2000, the Company repaid notes payable totaling $3.1
million. During 1999, the Company repaid all of its outstanding term and
revolver debt. Proceeds from the Company's Employee Stock Purchase Plan, the
401(k) Plan and the exercise of stock options provided the Company $2.0 million
in 2000. During 2000, the Company repurchased 496,000 shares of common stock
through open market and private transactions for an aggregate of $898,000.
The Company maintains a $10.0 million credit agreement (as amended to
date, the "C