815973v6
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number: 0-24866
ISOLYSER COMPANY, INC.
(Exact Name of registrant as specified in its charter)
GEORGIA 58-1746149
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4320 INTERNATIONAL BOULEVARD
NORCROSS, GEORGIA 30093
(Address of principal executive offices) (Zip Code)
(770) 806-9898
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.001 par value per share
stock purchase rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of common stock held by nonaffiliates of the
registrant based on the sale trade price of the common stock as reported on The
Nasdaq Stock Market on March 25, 1999, was approximately $67.9 million. For
purposes of this computation, all officers, directors and 5% beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors or 5% beneficial owners are,
in fact, affiliates of the registrant.
At March 25, 1999, there were outstanding 40,077,412 shares of the registrant's
common stock, $.001 par value per share.
Documents incorporated by reference: Certain exhibits provided in Part IV are
incorporated by reference from the Company's Registration Statements on Form S-1
(File Nos. 33-83474 and 33-97086), Registration Statement on Form S-4 (File No.
333-7977), Registration Statement on Form S-8 (File Nos. 33-85668), annual
report on Form 10-K for the periods ended December 31, 1994, December 31, 1995,
December 31, 1996, and December 31, 1997, quarterly report on Form 10-Q for the
period ended March 31, 1998, and current reports on Form 8-K dated May 31, 1995,
September 18, 1995, June 4, 1996, August 30, 1996, December 19, 1996, and August
11, 1998.
<PAGE>
Note One: The Form 10-K/A is filed to correct an arithmetic error included
in the Company's Form 10-K for the amount of the Company's Long-term debt at
December 31, 1998.
Note Two: The discussions in this Form 10-K contain forward-looking
statements that involve risks and uncertainties. The actual results of Isolyser
Company, Inc. and subsidiaries (the "Company") could differ significantly from
those set forth herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Business",
particularly "Business - Risk Factors", and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere in this Form 10-K. Statements contained in this Form 10-K
that are not historical facts are forward-looking statements that are subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.
A number of important factors could cause the Company's actual results for 1999
and beyond to differ materially from those expressed or implied in any forward-
looking statements made by, or on behalf of, the Company. These factors include,
without limitation, those listed in "Business - Risk Factors" in this Form 10-K.
PART II
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth summary historical financial data for each
of the five years in the period ended December 31, 1998. As a result of the 1996
acquisition of Microtek, which was accounted for as a pooling of interests, the
Company's financial statements have been restated to include the results of
Microtek for all periods presented. The operations data for the year ended
December 31, 1995 includes only partial operating results of SafeWaste and White
Knight because these acquisitions occurred effective May 31, 1995 and September
1, 1995, respectively. On July 1, 1995, the Company acquired the infection
control drape line of Xomed in exchange for Microtek's otology product line and
the operations data for the year ended December 31, 1995 therefore includes only
partial operating results for such acquisition transaction. The operations data
for the year ended December 31, 1995 does not give effect to the November 30,
1995 acquisition of Medi-Plast International, Inc. ("Medi-Plast"), as such
acquisition was consummated at Microtek's fiscal year end on November 30, 1995.
In April, 1996, Microtek purchased the Venodyne division of Advanced
Instruments, Inc., and the Company's results of operations include the results
of Venodyne only from the April 27, 1996 acquisition date. Additionally, during
1998 the Company disposed of its Arden and Charlotte, North Carolina and
Abbeville, South Carolina manufacturing facilities, its industrial and Struble &
Moffitt divisions of its White Knight subsidiary, and substantially all of its
net assets of its SafeWaste subsidiary. The summary historical financial data
should be read in conjunction with the historical consolidated financial
statements of the Company and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data appearing elsewhere in this Form 10-K. The summary
historical financial data for each of the five years in the period ended
December 31, 1998 has been derived from the Company's audited consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales..................... $ 73,382 $ 104,874 $ 164,906 $ 159,940 $ 147,643
Cost of goods sold............ 49,928 74,953 128,598 142,093 109,936
----------- ----------- ---------- ---------- ---------
Gross Profit ....................... 23,454 29,921 36,308 17,846 37,707
Selling, general and 21,496 27,737 41,381 43,422 40,506
administrative ..............
Research and development .... 1,246 1,127 2,173 2,601 3,582
Amortization of intangibles . 1,505 2,411 4,290 3,847 2,052
Impairment loss ............ 0 0 0 57,310 7,445
Restructuring charge ........ 140 0 4,410 0 -
Costs associated with merger.. 0 0 3,372 0 -
----------- ----------- ---------- ---------- ---------
Total operating expenses ......... 24,587 31,275 55,626 107,180 53,585
----------- ----------- ---------- ---------- ---------
Loss from operations .............. (933) (1,354) (19,318) (89,334) (15,878)
----------- ----------- ---------- ---------- ---------
Net other income (expense) ....... 49 1,790 (1,316) (3,415) (3,222)
Income (loss) before tax, extraordinary
items and cumulative effect of change
in accounting principle ....... (884) 436 (20,634) (92,749) (19,100)
Income tax provision (benefit) ... 455 980 (639) 354 541
----------- ----------- ---------- ---------- ---------
Loss before extraordinary items and
cumulative effect of change in
accounting principle............. (1,339) (544) (19,995) (93,103) (19,641)
Extraordinary items ................ 0 0 457(2) 0
Cumulative effect of change 57(1) 0
in accounting principle........ 0 (800)(3) 1,404(2)
----------- ----------- ---------- ---------- ---------
Net loss......................... $ (1,282) $ (544) $ (20,452) $ (93,903) $ (18,237)
=========== ========== =========== ========= ===========
Loss per common and common equivalent share
-Basic and Diluted
Loss before extraordinary item and
cumulative effect of change in
accounting principle ... $ (0.05) $ (0.02) $ (0.52) $ (2.37) $ (0.49)
Extraordinary items ......... 0.00 0.00 (0.01) - 0.03
Cumulative effect of change in
accounting principle ........ 0.00 0.00 0.00 (0.02)
----------- ----------- ---------- ---------- ---------
Net loss ..................... $ (0.05) $ (0.02) $ (0.53) $ (2.39) $ (0.46)
=========== =========== ========== ========== =========
Weighted average number of common and
common equivalent shares outstanding 27,080 33,704 38,763 39,273 39,655
</TABLE>
- -----------------
(1) The change in accounting principle reflects the adoption on January 1, 1994
of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
(2) Gives effect to the gain from the extinguishment of debt in 1998 and the
loss from refinancing of Isolyser's and Microtek's credit facilities, net of tax
benefits of $332,000 in 1996
(3) The change in accounting principle reflects the adoption of Emerging Issues
Task Force ("EITF") No. 97-13, "Accounting for Costs Incurred in Connection with
a Consulting Contract or an Internal Process that Combines Processing
Reengineering and Information Technology Transformation."
<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital....................... $ 88,527 $ 101,022 $ 91,962 $ 72,408 $ 39,124
Intangible assets, net................. 17,994 60,004 57,331 30,803 29,128
Total assets............................. 132,973 253,261 250,935 144,334 109,518
Long-term debt......................... 6,779 26,413 47,029 37,546 19,376
Redeemable common stock.......... 1,717 0 0 0 0
Total shareholders' equity............ $ 110,662 $ 195,298 $ 178,804 $ 86,117 $ 68,676
</TABLE>
(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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) - Financial Statements and Schedules
The following financial statements and schedules are filed as part of this
annual report.
Consolidated Financial Statements and Independent Auditors' Report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31,
1998 and 1997
Consolidated Statements of Operations and Comprehensive Loss for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
Other schedules are omitted because they are not applicable, not required
or because required information is included in the consolidated financial
statements or notes thereto.
(3)(a) Exhibits
2.1 Articles of Merger of MedSurg Industries, Inc. and MedSurg Acquisition
Corp. dated December 31, 1993 (incorporated by reference to Exhibit
2.1 filed with the Company's Registration Statement on Form S-1, File
No. 33-83474)
2.2 Plan and Agreement of Merger dated December 31, 1993 of MedSurg
Industries, Inc. and MedSurg Acquisition Corp. (incorporated by
reference to Exhibit 2.2 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
2.3 Certificate of Merger and Name Change of MedSurg Industries, Inc. and
MedSurg Acquisition Corp. dated January 7, 1994 (incorporated by
reference to Exhibit 2.3 filed with the Company's Registration
Statement on Form S-1, File No. 33-84374)
2.4 Articles of Merger of Creative Research and Manufacturing, Inc. and
Creative Acquisition Corp. dated December 31, 1993 (incorporated by
reference to Exhibit 2.4 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
2.5 Plan and Agreement of Merger dated December 31, 1993 of Creative
Research and Manufacturing, Inc. and Creative Acquisition Corp.
(incorporated by reference to Exhibit 2.5 filed with the Company's
Registration Statement on Form S-1, File No. 33-83474)
2.6 Certificate of Merger and Name Change of Creative Research and
Manufacturing, Inc. and Creative Acquisition Corp. dated January 7,
1994 (incorporated by reference to Exhibit 2.6 filed with the
Company's Registration Statement on Form S-1, File No. 33-83474)
2.7 Agreement and Plan of Merger dated as of July 28, 1995 among the
Company, White Knight Acquisition Corp. and White Knight Healthcare,
Inc. (incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed October 3, 1995)
2.8 Agreement and Plan of Merger dated as of May 1, 1995 among the
Company, Isolyser/SafeWaste Acquisition Corp. and SafeWaste
Corporation (incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on June 15, 1995)
2.9 Articles of Merger dated May 31, 1995 of SafeWaste Corporation With
and Into Isolyser/SafeWaste Acquisition Corp. (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K
filed on June 15, 1995)
2.10 Certificate of Merger dated May 31, 1995 of Isolyser/SafeWaste
Acquisition Corp. and SafeWaste Corporation (incorporated by reference
to Exhibit 2.3 to the Company's Current Report on Form 8-K filed on
June 15, 1995)
2.11 Articles of Merger of White Knight Healthcare, Inc., and White Knight
Acquisition Corp., dated September 18, 1995 (incorporated by reference
to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on
October 3, 1995)
2.12 Certificate of Merger of White Knight Healthcare, Inc., and White
Knight Acquisition Corp., dated September 18, 1995 (incorporated by
reference to Exhibit 2.3 to the Company's Current Report on Form 8-K
filed October 3, 1995)
2.13 Stock Purchase Agreement dated December 31, 1993 between the Company,
MedSurg Acquisition Corp., Creative Acquisition Corp., MedSurg
Industries, Inc., Creative Research and Manufacturing, Inc. and
MedInvest Enterprises, Inc. (incorporated by reference to Exhibit 2.7
to the Company's Registration Statement on Form S-1, File No.
33-83474)
2.14 Agreement and Plan of Merger dated March 15, 1996 among the Company,
Microtek Medical, Inc. and MMI Merger Corp. (incorporated by reference
to the Joint Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-4, File No. 333-7977).
3.1 Articles of Incorporation of Isolyser Company, Inc. (incorporated by
reference to Exhibit 3.1 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474).
3.2 Articles of Amendment to Articles of Incorporation of Isolyser
Company, Inc. (incorporated by reference to Exhibit 3.2 filed with the
Company's Annual Report on Form 10-K for the period ending December
31, 1996)
3.3 Amended and Restated Bylaws of Isolyser Company, inc. (incorporated by
reference to Exhibit 3.2 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
3.4 First Amendment to Amended and Restated Bylaws of Isolyser Company,
Inc. (incorporated by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K filed July 29, 1996).
3.5 Second Amendment of Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K
filed December 20, 1996).
4.1 Specimen Certificate of Common Stock (incorporated by reference to
Exhibit 4.1 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474).
4.2 Shareholder Protection Rights Agreement dated as of December 20, 1996
between Isolyser Company, Inc. and SunTrust Bank (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
filed on December 20, 1996).
4.3 First Amendment to Shareholder Protection Rights Agreement dated as of
October 14, 1997 between Isolyser Company, Inc. and SunTrust Bank
(incorporated by reference to Exhibit 4.2 filed with the Company's
Current Report on Form 8-K/A filed on October 14, 1997)
10.1 Stock Option Plan and First Amendment to Stock Option Plan
(incorporated by reference to Exhibit 4.1 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
10.2 Second Amendment to Stock Option Plan (incorporated by reference to
Exhibit 4.1 filed with the Company's Registration Statement on Form
S-8, File No. 33-85668)
10.3 Form of Third Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.37 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1994)
10.4 Form of Fourth Amendment to the Stock Option Plan (incorporated by
reference to Exhibit 10.59 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1995).
10.5 Form of Fifth Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.5 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1996).
10.6 Form of Incentive Stock Option Agreement pursuant to Stock Option Plan
(incorporated by reference to Exhibit 4.2 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
10.7 Form of Non-Qualified Stock Option Agreement pursuant to Stock Option
Plan (incorporated by reference to Exhibit 4.3, filed with the
Company's Registration Statement on Form S-8, File No. 33-85668)
10.8 Form of Option for employees of the Company outside of Stock Option
Plan (incorporated by reference to Exhibit 10.6 filed with the
Company's Registration Statement on Form S-1, File No. 33-83474)
10.9 Employment Agreement of Lester J. Berry (incorporated by reference to
Exhibit 10.9 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1996).
10.10 Lease Agreement, dated July 29, 1993, between Richard E. Curtis,
Trustee and MedSurg Industries, Inc. (incorporated by reference to
Exhibit 10.25 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474)
10.11 First Lease Amendment, dated February 28, 1994, between Richard E.
Curtis, Trustee and MedSurg Industries, Inc. (incorporated by
reference to Exhibit 10.26 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
10.12 Lease Agreement, dated October 21, 1991, between Weeks Master
Partnership, L.P. and the Company (incorporated by reference to
Exhibit 10.27 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474)
10.13 Lease, dated September 28, 1984, between M.S.I. Limited Partnership
and MedSurg Industries, Inc. (incorporated by reference to Exhibit
10.28 filed with the Company's Registration Statement on Form S-1,
File No. 33-83474)
10.14 Amendment No. 1 to Lease, dated October 10, 1984, between M.S.I.
Limited Partnership and MedSurg Industries, Inc. (incorporated by
reference to Exhibit 10.29 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
10.15 Agreement and Second Amendment to Lease, dated December 31, 1993,
between M.S.I. Limited Partnership and MedSurg Industries, Inc.
(incorporated by reference to Exhibit 10.30 filed with the Company's
Registration Statement on Form S-1, File No. 33-83474)
10.16 Third Amendment to Lease, dated September 9, 1994, between M.S.I.
Limited Partnership and MedSurg Industries, Inc. (incorporated by
reference to Exhibit 10.31 filed with the Company's Registration
Statement on Form S-1, File No. 33-83474)
10.17 Form of Indemnity Agreement entered into between the Company and
certain of its officers and directors (incorporated by reference to
Exhibit 10.45 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474)
10.18 Amended and Restated Credit Agreement dated as of August 30, 1996,
among the Company, MedSurg, Microtek, White Knight, the Guarantors
named therein, the Lenders named therein and The Chase Manhattan Bank
(incorporated by referenced to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed on September 13, 1996).
10.19 Lease Agreement, dated November 18, 1994, between Weeks Realty, L.P.
and the Company (incorporated by reference to Exhibit 10.38 filed with
the Company's Annual Report on Form 10-K for the period ended December
31, 1994)
10.20 1995 Nonemployee Director Stock Option Plan (incorporated by reference
to Exhibit 10.39 filed with the Company's Annual Report on Form 10-K
for the period ended December 31, 1994)
10.21 Agreement and Lease dated October 1, 1992 between Industrial
Development Authority of the City of Douglas, Arizona and White Knight
Healthcare, Inc. (incorporated by reference to Exhibit 10.41 filed
with the Company's Registration Statement on Form S-1 File No.
33-97086)
10.22 Product Purchase and Supply Agreement dated February 8, 1993 between
White Knight Healthcare, Inc. and Sterile Concepts, Inc. (incorporated
by reference to Exhibit 10.42 filed with the Company's Registration
Statement on Form S-1 File No. 33-97086)
10.23 Non-Negotiable Promissory Note in the original principal amount of
$2,304,000.00 dated February 8, 1993 between White Knight Healthcare,
Inc. and Sterile Concepts, Inc. (incorporated by reference to Exhibit
10.43 filed with the Company's Registration Statement on Form S-1 File
No. 33-97086)
10.24 Non-Negotiable Promissory Note in the original principal amount of
$1,278,500.00 dated February 8, 1993 between White Knight Healthcare,
Inc. and Sterile Concepts, Inc. (incorporated by reference to Exhibit
10.44 filed with the Company's Registration Statement on Form S-1 File
No. 33-97086)
10.25 Form of Non-Negotiable Promissory Note in the original Principal
amount of $750,000 dated September 15, 1995 between the Company and
Ali R. Momtaz (incorporated by reference to Exhibit 10.46 filed with
the Company's Registration Statement on Form S-1 File No. 33-97086)
10.26 Distribution and Marketing Agreement dated September 15, 1995 between
the Company and Sterile Concepts, Inc. (incorporated by reference to
Exhibit 10.48 filed with the Company's Registration Statement on Form
S-1 File No. 33-97086)
10.27 Agreement, dated March 18, 1995 between White Knight Hospital
Disposables and United Food and Commercial Workers Local 99R
(incorporated by reference to Exhibit 10.50 filed with the Company's
Registration Statement on Form S-1 File No. 33-97086)
10.28 Labor Contract, dated July 22, 1994, between Union of Industrial,
Related and Similar Workers of the Municipality of Agua Prieta,
Sonora, C.R.O.M. and Industrias Apson, S.A. de C.V. (incorporated by
reference to Exhibit 10.51 filed with the Company's Registration
Statement on Form S-1 File No. 33-97086)
10.29 Lease, dated October 1, 1995, between SafeWaste Corporation and
Highwoods/Forsyth Limited Partnership (incorporated by reference to
Exhibit 10.56 filed with the Company's Registration Statement on Form
S-1 File No. 33-97086)
10.30 1995 Employee Stock Purchase Plan, as amended by First Amendment dated
July 1, 1995 (incorporated by reference to Exhibit 10.57 filed with
the Company's Registration Statement on Form S-1 File No. 33-97086)
10.31 Second Amendment to 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.58 to the Company vs. Annual Report on Form
10-K for the period ended December 31, 1995)
10.32 Third Amendment to 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K
for the period ending December 31, 1996).
10.33 Asset Exchange Agreement dated July, 1995 between Microtek and Xomed,
Inc. (incorporated by reference to Exhibit 10.9 to Microtek's Annual
Report on Form 10-K for the period ended November 30, 1995).
10.34 Asset Purchase Agreement dated November 30, 1995 among Microtek,
Medi-Plast International, Inc. and certain affiliates of Medi-Plast
International, Inc. (incorporated by reference to Microtek's Current
Report on Form 8-K dated December 8, 1995).
10.35 Asset Purchase Agreement dated April 27, 1996 between Microtek and
Advanced Instruments, Inc. (incorporated by reference to Exhibit 2.1
to Microtek's Current Report on Form 8-K dated May 15, 1996).
10.36 Employment Agreement dated as of April 11, 1997 between Isolyser
Company, Inc. and Gene R. McGrevin (incorporated by reference to
Exhibit 10.36 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1997).
10.37 Employment Agreement effective as of April 1, 1997, between Isolyser
Company, Inc. and Dan R. Lee (incorporated by reference to Exhibit
10.37 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
10.38 Employment Agreement dated as of May 1, 1997 between Isolyser Company,
Inc. and Robert L. Taylor (incorporated by reference to Exhibit 10.38
filed with the Company's Annual Report on Form 10-K for the period
ended December 31, 1997).
10.39 Employment Agreement effective as of March 1, 1998, between Isolyser
Company, Inc. and Peter Schmitt (incorporated by reference to Exhibit
10.39 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
10.40 Asset Purchase Agreement dated August 11, 1998, between White Knight
Healthcare, Inc. and Thantex Holdings, Inc. (incorporated by reference
to Exhibit 2.1 filed with the Company's Current Report on Form 8-K
dated August 11, 1998).
10.41 Asset Purchase Agreement dated August 11, 1998, between SafeWaste
Corporation and SafeWaste, Inc. (incorporated by reference to Exhibit
2.2 filed with the Company's Current Report on Form 8-K dated August
11, 1998).
10.42 Arden Plant Agreement dated August 11, 1998, between Isolyser Company,
Inc., Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.3
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
10.43 Barmag Agreement dated August 11, 1998, between Isolyser Company, Inc.
and Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.4
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
10.44 PVA Agreement dated August 11, 1998, between Isolyser Company, Inc.
and Thantex Holdings, Inc. (incorporated by reference to Exhibit 2.5
filed with the Company's Current Report on Form 8-K dated August 11,
1998).
10.45 Abbeville Plant Agreement dated August 11, 1998, between Isolyser
Company, Inc., Thantex Specialties, Inc. and Thantex Holdings, Inc.
(incorporated by reference to Exhibit 2.6 filed with the Company's
Current Report on Form 8-K dated August 11, 1998).
10.46 Employment Agreement dated as of January 1, 1998, between the Company
and Terence N. Furness (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
10.47 Employment Agreement dated as of February 1, 1998, between the Company
and Migirdic Nalbantyan (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
10.48* Severance Agreement dated as of October 1, 1998, between the Company
and Terence N. Furness.
10.49* Severance Memorandum of Understanding dated August 5, 1998 between the
Company and Steve Plante.
10.50* Employment Agreement dated May 27, 1998, between the Company and
Lester J. Berry as amended by letter agreement dated December 16,
1998.
11.1* Statement re: computation of per share earnings
21.1* Subsidiaries of the Company
23.1* Consent of Deloitte & Touche LLP
27.1* Financial Data Schedule
- --------------------------------------
* Incorporated by reference to the corresponding exhibit to the Company's
Annual Report on Form 10-K for the period ended December 31, 1998.
(b) Reports on Form 8-K: Form 8-K/A, filed October 26, 1998.
3(b) Executive Compensation Plans and Arrangements.
1. Stock Option Plan and First Amendment to Stock Option Plan
(incorporated by reference to Exhibit 4.1 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
2. Second Amendment to Stock Option Plan (incorporated by reference to
Exhibit 4.1 filed with the Company's Registration Statement on Form
S-8, File No. 33-85668)
3. Form of Third Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.37 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1994)
4. Form of Fourth Amendments to the Stock Option Plan (incorporated by
reference to Exhibit 10.59 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1995).
5. Form of Fifth Amendment to Stock Option Plan (incorporated by
reference to Exhibit 10.5 filed with the Company's Annual Report on
Form 10-K for the period ended December 31, 1996).
6. Form of Incentive Stock Option Agreement pursuant to Stock Option Plan
(incorporated by reference to Exhibit 4.2 filed with the Company's
Registration Statement on Form S-8, File No. 33-85668)
7. Form of Non-Qualified Stock Option Agreement pursuant to Stock Option
Plan (incorporated by reference to Exhibit 4.3, filed with the
Company's Registration Statement on Form S-8, File No. 33-85668)
8. Form of Option for employees of the Company outside of Stock Option
Plan (incorporated by reference to Exhibit 10.6 filed with the
Company's Registration Statement on Form S-1, File No. 33-83474)
9. Employment Agreement of Lester J. Berry (incorporated by reference to
Exhibit 10.9 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1996).
10. Form of Indemnity Agreement entered into between the Company and
certain of its officers and directors (incorporated by reference to
Exhibit 10.45 filed with the Company's Registration Statement on Form
S-1, File No. 33-83474)
11. 1995 Nonemployee Director Stock Option Plan (incorporated by reference
to Exhibit 10.39 filed with the Company's Annual Report on Form 10-K
for the period ended December 31, 1994)
12. 1995 Employee Stock Purchase Plan, as amended by First Amendment dated
July 1, 1995 (incorporated by reference to Exhibit 10.57 filed with
the Company's Registration Statement on Form S-1 File No. 33-97086)
13. Second Amendment to 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.58 to the Company vs. Annual Report on Form
10-K for the period ended December 31, 1995)
14. Third Amendment to 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K
for the period ending December 31, 1996).
15. Employment Agreement dated as of April 11, 1997 between Isolyser
Company, Inc. and Gene R. McGrevin (incorporated by reference to
Exhibit 10.36 filed with the Company's Annual Report on Form 10-K for
the period ended December 31, 1997).
16. Employment Agreement effective as of April 1, 1997, between Isolyser
Company, Inc. and Dan R. Lee(incorporated by reference to Exhibit
10.37 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
17. Employment Agreement dated as of May 1, 1997 between Isolyser Company,
Inc. and Robert L. Taylor (incorporated by reference to Exhibit 10.38
filed with the Company's Annual Report on Form 10-K for the period
ended December 31, 1997).
18. Employment Agreement effective as of March 12, 1998, between Isolyser
Company, Inc. and Peter Schmitt(incorporated by reference to Exhibit
10.39 filed with the Company's Annual Report on Form 10-K for the
period ended December 31, 1997).
19. Employment Agreement dated as of January 1, 1998, between the Company
and Terence N. Furness (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
20. Employment Agreement dated as of February 1, 1998, between the Company
and Migirdic Nalbantyan (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
21. Severance Agreement dated as of October 1, 1998, between the Company
and Terence N. Furness.
22. Severance Memorandum of Understanding dated August 5, 1998 between the
Company and Steve Plante.
23. Employment Agreement dated May 27, 1998, between the Company and
Lester J. Berry as amended by letter agreement dated December 16,
1998.
<PAGE>
815973v6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized on May 7,
1999.
ISOLYSER COMPANY, INC.
By: /S/ MIGIRDIC NALBANTYAN
------------------------------
Migirdic Nalbantyan, President
and Chief Executive Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of Isolyser Company, Inc.:
We have audited the consolidated balance sheets of Isolyser Company, Inc. and
subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of operations and comprehensive loss, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the index at Item 14. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on our audits. The
consolidated financial statements give retroactive effect to the merger of the
Company and Microtek Medical, Inc. ("Microtek") which has been accounted for as
a pooling of interests as described in Note 2 to the consolidated financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and comprehensive
loss and its cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles. Also, in
our opinion such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, the Company
changed its method of accounting for business process reengineering costs.
Atlanta, Georgia Deloitte & Touche LLP
March 22, 1999
<PAGE>
<TABLE>
<CAPTION>
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 7,324,976 $ 9,298,800 CURRENT LIABILITIES:
Accounts receivable, net of Accounts payable $ 6,246,514 $ 10,108,429
allowance for doubtful Accrued compensation 2,221,430 2,519,672
accounts of $1,038,563 and Other accrued liabilities 3,389,214 3,124,204
$1,643,951, respectively 18,117,970 13,909,271
Inventories, net 23,646,914 32,067,351 Current portion of long-term debt 9,394,767 4,609,493
----------- -------------
Prepaid inventories 337,306
Net assets held for sale 9,872,825 35,750,491 Total current liabilities 21,251,925 20,361,798
Prepaid expenses and other
assets 1,075,693 1,746,131
------------ ------------
Total current assets 60,375,684 92,772,044 LONG-TERM DEBT 19,376,097 37,545,894
PROPERTY AND EQUIPMENT: DEFERRED RENT 214,370 309,372
Land 244,390 964,390
Building and leasehold
improvements 9,455,246 11,757,796 COMMITMENTS AND CONTINGENCIES (Note 8)
Equipment 14,941,168 16,600,424
Furniture and fixtures 2,709,327 2,503,121 SHAREHOLDERS' EQUITY:
Construction-in-progress 3,722,019 1,217,335 Participating preferred stock, no
------------ ------------ par, 500,000 shares authorized,
31,072,150 33,043,066 none issued
Less accumulated depreciation 15,510,793 13,050,991 Common stock, $.001 par; 100,000,000
------------ ------------ shares authorized; 39,803,774 and
Property and equipment, net 15,561,357 19,992,075 39,554,411 shares issued, respectively 39,804 39,554
INTANGIBLE ASSETS: Additional paid-in capital 203,363,722 203,601,184
Accumulated deficit (133,979,888) (115,743,281)
Goodwill 34,893,115 34,581,870 Unearned shares restricted to
Customer lists 1,285,898 1,285,898 employee stock ownership plan (240,000) (300,000)
Patent and license agreements 2,463,781 2,444,070 Cumulative translation adjustment (74,617) (103,526)
Noncompete agreements 385,000 385,000 ------------- -------------
69,109,021 87,493,931
Other 362,101 355,705 Treasury shares, at cost
------------ ------------ (46,999 and 174,259 shares,
39,389,895 39,052,543 respectively) (433,890) (1,377,364)
------------- -------------
Less accumulated amortization 10,262,226 8,249,130
------------ ------------
Intangible assets, net 29,127,669 30,803,413 Total shareholders' equity 68,675,131 86,116,567
INVESTMENT IN JOINT VENTURE 110,463
INVESTMENT IN THANTEX 3,604,371
OTHER ASSETS - Net 848,442 655,636
------------ ------------ ------------ ------------
$109,517,523 $144,333,631 $109,517,523 $144,333,631
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET SALES $ 147,642,941 $ 159,939,799 $ 164,906,050
COST OF GOODS SOLD 109,935,577 142,093,456 128,597,814
-------------- -------------- --------------
Gross profit 37,707,364 17,846,343 36,308,236
OPERATING EXPENSES:
Selling general and administration 40,506,711 43,421,851 41,381,791
Amortization of intangibles 2,052,115 3,847,223 4,289,850
Research and development 3,581,608 2,600,824 2,172,910
Impairment loss 7,444,903 57,310,274
Restructuring charge 4,410,536
Costs associated with merger 3,371,546
-------------- -------------- --------------
Total operating expenses 53,585,337 107,180,172 55,626,633
-------------- -------------- --------------
LOSS FROM OPERATIONS (15,877,973) (89,333,829) (19,318,397)
INTEREST INCOME 273,521 555,306 1,708,766
INTEREST EXPENSE (3,507,088) (3,926,500) (2,990,147)
INCOME (LOSS) FROM JOINT VENTURE 11,160 (44,000) (34,246)
-------------- -------------- --------------
LOSS BEFORE INCOME TAX PROVISION (BENEFIT),
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (19,100,380) (92,749,023) (20,634,024)
INCOME TAX PROVISION (BENEFIT) 540,227 354,331 (639,120)
-------------- -------------- --------------
LOSS BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (19,640,607) (93,103,354) (19,994,904)
EXTRAORDINARY ITEMS - Gain from extinguishment
of debt, net of tax of $0 in 1998 and loss from
refinancing of credit facilities, net of tax
benefit of $332,041 in 1996 1,404,000 (457,465)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of tax of $0 (800,000)
-------------- -------------- --------------
NET LOSS (18,236,607) (93,903,354) (20,452,369)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss) 28,909 (118,249) 57,067
-------------- -------------- --------------
COMPREHENSIVE LOSS $ (18,207,698) $ (94,021,603) $ (20,395,302)
============== ============= =============
LOSS PER COMMON SHARE - Basic and diluted:
Loss before extraordinary items and cumulative
effect of change in accounting principle $ (0.49) $ (2.37) $ (0.52)
Extraordinary items 0.03 (0.01)
Cumulative effect of change in accounting
principle (0.02)
-------------- -------------- --------------
NET LOSS $ (0.46) $ (2.39) $ (0.53)
-------------- -------------- --------------
WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - Basic and Diluted 39,655,190 39,272,691 38,762,750
============== ============= =============
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ISSUED ADDITIONAL ACCUMULATED TRANSLATION ESOP TREASURY SHAREHOLDERS'
PAID-IN
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SHARES SHARES EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1995 38,352,649 $38,353 $199,607,972 $ (1,414,278) $ (42,344) $(420,000) $(2,471,265) $195,298,438
Microtek net income for December,
1995 26,720 26,720
Exercise of stock options and
warrants 989,183 989 3,118,021 3,119,010
Issuance of 9,985 shares of
common stock from treasury
pursuant to ESPP 43,860 74,685 118,545
Vesting of performance stock
options 500,000 500,000
Release of 16,500 shares reserved
for ESOP 76,125 60,000 136,125
Currency translation gain 57,067 57,067
Net loss (20,452,369) (20,452,369)
---------- ------- ------------ ------------- --------- --------- ----------- ------------
BALANCE - December 31, 1996 39,341,832 39,342 203,345,978 (21,839,927) 14,723 (360,000) (2,396,580) 178,803,536
Exercise of stock options and
warrants 205,139 205 750,270 750,475
Issuance of 51,482 shares of
common stock from treasury
pursuant to ESPP (79,797) 386,115 306,318
Issuance of 107,484 shares of
common stock from treasury
pursuant to 401(k) plan (417,182) 806,131 388,949
Release of 16,500 shares
reserved for ESOP (21,328) 60,000 38,672
Exchange of 6,000 issued and
outstanding common shares
for 7,440 new common shares 7,440 7 23,243 (23,250)
Release of 7,681 White Knight
escrow shares (149,780) (149,780)
Currency translation loss (118,249) (118,249)
Net loss (93,903,354) (93,903,354)
---------- ------- ------------ ------------- --------- --------- ----------- ------------
BALANCE - December 31, 1997 39,554,411 39,554 203,601,184 (115,743,281) (103,526) (300,000) (1,377,364) 86,116,567
Issuance of 128,148 shares of
common stock from treasury
pursuant to ESPP (706,004) 960,790 254,786
Issuance of 249,363 shares of
common stock pursuant to
401(k) plan 249,363 250 511,079 511,329
Release of 16,500 shares
reserved for ESOP (42,537) 60,000 17,463
Release of 888 White Knight
escrow shares (17,316) (17,316)
Currency translation gain 28,909 28,909
Net loss (18,236,607)
---------- ------- ------------ ------------- --------- --------- ----------- ------------
BALANCE - December 31, 1998 39,803,774 $39,804 $203,363,722 $(133,979,888) $ (74,617) $(240,000) $ (433,890) $ 68,675,131
========== ======= ============ ============= ========= ========= =========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(18,236,607) $(93,903,354) $(20,452,369)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Microtek net income for December 1995 26,720
Depreciation 3,726,744 7,524,005 6,552,416
Amortization 2,052,031 3,847,223 4,289,850
Provision for doubtful accounts 290,643 375,442 145,092
Provision for obsolete and slow moving inventory 43,216 14,694,250 9,479,426
Loss on disposal of property and equipment 138,403 207,252
Impairment loss 7,444,903 57,310,274 2,169,934
(Income) loss from joint venture (11,160) 44,000 34,426
Extraordinary gain from extinguishment of debt (1,404,000)
Compensation expense related to ESOP 17,462 38,672 136,125
Compensation expense related to vesting of variable options 500,000
Changes in assets and liabilities, net of effects from
purchased and disposed businesses:
Accounts receivable (3,520,532) 4,408,808 (4,128,080)
Inventories 7,574,637 4,314,164 (25,708,431)
Prepaid inventories 104,113 (404,438) 245,116
Prepaid expenses and other assets 778,432 698,272 (1,305,973)
Deferred income taxes (1,357,482)
Other assets (372,359) (259,459) (185,977)
Accounts payable (4,658,180) 2,157,788 (5,531,890)
Accrued compensation (269,247) 278,315 (434,562)
Other liabilities (155,564) (388,098) (3,528)
Other accrued liabilities 772,004 177,913 1,597,373
------------ ------------ ------------
Net cash (used in) provided by operating activities (5,823,464) 1,052,180 (33,724,562)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of and deposits for property and equipment (3,299,172) (4,013,545) (19,081,793)
Purchase of businesses, net of cash acquired (5,873,503)
Proceeds from the sale of assets held for sale 20,415,880 262,500
------------ ------------ ------------
Net cash provided by (used in) investing activities 17,116,708 (3,751,045) (24,955,296)
------------ ------------ ------------
FINANCING ACTIVITIES:
Borrowings under line of credit agreements 56,629,571 53,068,155 74,943,720
Repayments under line of credit agreements (57,802,024) (57,240,650) (52,264,517)
Increase (decrease) in bank overdraft (146,800) (2,721,485) 1,429,174
Proceeds from notes payable 109,523 1,338,022 13,844,872
Repayment of notes payable (12,852,362) (4,699,355) (16,461,380)
Proceeds from issuance of treasury stock 254,786 695,267 118,545
Proceeds from exercise of stock options and warrants 750,475 3,119,010
Proceeds from the issuance of common stock 511,329
------------ ------------ ------------
Net cash (used in) provided by financing activities (13,295,977) (8,809,571) 24,729,424
------------ ------------ ------------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
EFFECT OF EXCHANGE RATE CHANGES ON CASH 28,909 (118,249) 57,067
------------ ------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,973,824) (11,626,685) (33,893,367)
CASH AND CASH EQUIVALENTS:
Beginning of year 9,298,800 20,925,485 54,818,852
------------ ------------ ------------
End of year $ 7,324,976 $ 9,298,800 $ 20,925,485
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of interest capitalized) $ 3,437,038 $ 3,772,635 $ 2,797,865
============ ============ ============
Income taxes $ 344,184 $ 217,952 $ 1,922,656
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Stock received in exchange for assets disposed $ 3,604,571 $ 243,327 $ 1,008,503
============ ============ ============
Equipment acquired through capital leases $ 276,990 $ 243,327 $ 1,008,503
============ ============ ============
(Concluded)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ISOLYSER COMPANY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Isolyser Company, Inc. and subsidiaries (the "Company") develop,
manufacture, and market proprietary and other products and services for
patient care, occupational safety, and management of potentially infectious
and hazardous waste primarily for the domestic health care market which
represents one business segment. The Company's products provide an umbrella
of protection from potentially infectious and hazardous waste for patients,
staff, the public, and the environment by facilitating the safe and
cost-effective disposal of such waste at the Point-of-Generation(TM). The
Company markets its products to hospitals and other end users through
distributors and directly through its own sales force.
The Company's future performance will depend to a substantial degree upon
its ability to successfully market its patented OREX Degradables (TM)
products ("OREX") in commercial quantities. The Company's sales of OREX
products were $4,721,000, $8,139,000 and $7,097,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Consolidation Policy - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition - Revenues from the sale of the Company's products are
recognized at the time of shipment. The Company generally only accepts
returns for damaged products. Actual returns have not been
significant.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Inventories - Inventories are stated at the lower of cost or market. The
first-in first-out ("FIFO") valuation method is used to determine the cost
of inventories except for the inventories held by the Company's subsidiary,
White Knight Healthcare, Inc. ("White Knight"). White Knight uses the
last-in first-out ("LIFO") inventory valuation method. Cost includes
material, labor, and manufacturing overhead for manufactured and assembled
goods and materials only for goods purchased for resale. Inventories are
stated net of an allowance for obsolete and slow-moving inventory.
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation and is depreciated using the straight-line method
over the estimated useful lives of the related assets. During 1996, the
Company capitalized as part of property and equipment $220,000 of interest.
Intangible Assets - Intangible assets consist primarily of goodwill,
customer lists, and noncompete agreements. Goodwill represents the excess
of the cost of acquired businesses over the fair value of net identifiable
assets acquired and is amortized using the straight-line method over 10 to
40 years. Customer lists and noncompete agreements are amortized using the
straight-line method over 4 to 15 years.
Investment in Joint Venture - Investment in the joint venture is accounted
for using the equity method of accounting. The joint venture investment
represented a 50% ownership interest in a mobile waste treatment operation
which was sold in conjunction with the August 11, 1998, disposition of
Safewaste.
Investment in Thantex - Investment in Thantex represents a 19.5% ownership
interest in a company formed to own and operate the Arden and Abbeville
manufacturing facilities and is accounted for under the cost method of
accounting (Note 3).
Research and Development Costs - Research and development costs are charged
to expense as incurred.
Cash and Cash Equivalents - Cash equivalents are short-term, highly liquid
investments with original maturities of three months or less consisting
entirely of U.S. government securities or government backed securities.
These investments are classified in accordance with Statement of Financial
Accounting Standards ("SFAS") 115, Accounting for Certain Investments in
Debt and Equity Securities, as available for sale securities and are stated
at cost which approximates market.
Income Taxes - Deferred tax assets and liabilities are determined based on
the difference between financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized (Note 7).
Foreign Currency Translation - The assets and liabilities of the Company's
United Kingdom and Mexican subsidiaries are translated into U.S. dollars at
current exchange rates, and revenues and expenses are translated at average
exchange rates. As the Mexican subsidiaries' operations are an extension of
the Company's operations, the U.S. dollar is considered to be the
functional currency and any exchange gains or losses are included in net
income. The effect of foreign currency transactions was not material to the
Company's results of operations for the years ended December 31, 1998,
1997, and 1996.
Impairment of Long-Lived Assets - The Company reviews long-lived assets and
certain intangibles for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Any
impairment losses are reported in the period in which the recognition
criteria are first applied based on the fair value of the asset. Assets
held for disposal are carried at the lower of carrying amount or fair
value, less estimated cost to sell such assets. The Company discontinues
depreciating or amortizing assets held for sale effective with the decision
to sell the assets (Note 3).
Earning Per Share - Earnings per share is calculated in accordance with
SFAS 128, Earnings Per Share, which was adopted in 1997 and calls for the
restatement of all periods presented on a comparative basis. This Statement
simplifies the standards for computing earnings per share ("EPS")
previously found in Accounting Principles Board Opinion ("APB") 15,
Earnings Per Share, by replacing the presentation of primary EPS with basic
EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS under APB 15. For 1998, 1997, and 1996, there were no
significant differences in weighted average shares outstanding for the
basic and diluted EPS computations.
Newly Issued Accounting Standards - In June 1997, the Financial Accounting
Standards Board issued SFAS 130, Reporting Comprehensive Income and SFAS
131, Disclosures About Segments of an Enterprise and Related Information.
SFAS 130 establishes standards for the reporting and displaying of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. SFAS 131
establishes standards for the way that a public company reports select
information about operating segments. The Company adopted SFAS 130 and SFAS
131 in 1998. Adoption of these new pronouncements had no effect on the
Company's results of operations or financial position. In June 1998, the
Financial Accounting Standards Board issued SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. The Company is
currently evaluating the impact that this standard will have on its results
of operations and financial position upon adoption.
Reclassifications - Certain reclassifications have been made in the 1997
and 1996 financial statements to conform to the 1998 classifications.
2. DISPOSITIONS AND ACQUISITIONS
DISPOSITIONS
On February 25, 1998, the Company approved a plan to dispose of its Arden
and Charlotte, North Carolina and Abbeville, South Carolina OREX
manufacturing facilities and White Knight subsidiary and reflected the net
assets of these entities as available-for-sale at December 31, 1997.
On August 11, 1998, the Company disposed of its Arden and Charlotte, North
Carolina OREX manufacturing facilities, 4.5 million pounds of OREX
Inventory (Note 8), the industrial division of its White Knight subsidiary
and substantially all of the assets of its SafeWaste subsidiary (classified
as held for use at December 31, 1997) for proceeds of approximately $13.5
million in cash. On October 14, 1998, the Company disposed of its
Abbeville, South Carolina OREX manufacturing facility for proceeds of
approximately $8 million, consisting of $7.5 million in cash and a $500,000
8% note payable due October 14, 2003. The net cash proceeds from these
dispositions were used to repay amounts borrowed under the Company's Credit
Agreement (Note 5). In conjunction with these dispositions, the Company
also received a 19.5% ownership interest in Thantex, the company formed to
own and operate the Arden and Abbeville facilities (Note 1).
On December 15, the Company disposed of the Struble and Moffit division of
its White Knight subsidiary for proceeds of $1.2 million.
On February 4, 1999, the Company signed a letter of intent to dispose of
its former corporate headquarters located in Norcross, Georgia, for
estimated net cash proceeds of $2.0 million which will be used to repay
amounts borrowed under the Company's Credit Agreement. The Company
anticipates completing this disposition by March 31, 1999, and has
reflected this asset as held for sale at December 31, 1998.
At December 31, 1998 and 1997, net assets held for sale are comprised of
the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets:
Accounts receivable $ 3,589,000 $ 8,848,000
Inventory (LIFO basis) 6,156,000 11,748,000
Prepaid inventory (LIFO basis) 588,000 1,337,000
Prepaid expenses and other assets 71,000 186,000
Property and equipment, net 2,000,000 19,980,000
Other assets 73,000 286,000
----------- -----------
Total assets 12,477,000 42,385,000
Liabilities:
Accounts payable 1,441,000 2,247,000
Bank overdraft 361,000 508,000
Accrued compensation 261,000 766,000
Accrued expenses 525,000 1,278,000
Long-term debt 16,000 1,836,000
----------- -----------
Total liabilities 2,604,000 6,635,000
----------- -----------
Net assets held for sale $ 9,873,000 $35,750,000
=========== ===========
</TABLE>
The effect of not depreciating net assets held for sale was $3.1 million
and $0 in 1998 and 1997, respectively. The Company anticipates disposing of
these net assets during 1999.
The following represents the results of operations (including impairment
charges) of the above noted entities for the years ended December 31, 1998
and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net sales $ 38,990,000 $ 49,931,000
Net loss (16,577,000) (86,357,000)
Net loss per share - Basic and Diluted (0.41) (2.20)
</TABLE>
ACQUISITIONS
On August 30, 1996, the Company merged with Microtek Medical, Inc.
("Microtek"), a manufacturer and marketer of a broad range of medical and
surgical supplies, and, in connection therewith, issued 7,722,965 shares of
common stock for all of Microtek's outstanding common stock. Costs related
to the merger of $3,372,000 were charged to expense primarily in the third
quarter of fiscal 1996. The merger was accounted for as a pooling of
interests and, accordingly, the Company's financial statements have been
restated to include the results of Microtek for all periods presented. In
conjunction with the merger, certain stock options issued to officers of
Microtek became fully vested, and, accordingly, $500,000 of compensation
expense related to this vesting was recognized as additional paid-in
capital. Combined and separate results of the Company and Microtek for the
periods prior to the merger are as follows:
<TABLE>
<CAPTION>
ISOLYSER MICROTEK ELIMINATIONS COMBINED
<S> <C> <C> <C> <C>
Nine months ended September 30, 1996
Net sales $93,886 $30,516 $(804) $123,598
Extraordinary item (292) (283) (575)
Net income (loss) (6,406) 2 (6,404)
</TABLE>
Note: All eliminations are related to intercompany sales and purchases.
In connection with the merger, Microtek changed its fiscal year-end from
November 30 to December 31, which conforms to Isolyser's fiscal year-end.
Microtek's separate results for fiscal 1996 have been restated to a
December 31 year-end.
On April 28, 1996, the Company acquired substantially all of the assets of
Venodyne, a manufacturer and marketer of medical products, for $4,000,000
in cash financed by Microtek's credit facility, a $1,750,000 note payable
(Note 5), and additional consideration not to exceed $1,000,000, based on
sales of certain of Venodyne's products, through April 1999. Through
December 31, 1998, $798,000 in additional consideration has been paid.
Goodwill arising from this acquisition is being amortized using the
straight-line method over 25 years. This acquisition has been accounted for
using the purchase method of accounting. The consolidated statements of
operations include the operations of this business since its acquisition
date.
The following unaudited pro forma information for 1996 gives effect to this
acquisition as if it had occurred on January 1, 1996:
<TABLE>
<CAPTION>
1996
<S> <C>
Net sales $166,492,000
Net loss (20,697,000)
Net loss per share - Basic and Diluted (0.53)
</TABLE>
The pro forma consolidated information is not necessarily indicative of the
results that would have been reported had such acquisitions occurred on
such dates, nor is it indicative of the Company's future operations.
3. IMPAIRMENT LOSS AND RESTRUCTURING CHARGE
IMPAIRMENT LOSS
During the fourth quarter of 1997, the Company determined that its Orex
manufacturing facilities in Arden and Charlotte, North Carolina and
Abbeville, South Carolina and its White Knight subsidiary were impaired
based on analyses of undiscounted future operating cash flows from these
entities. As a result, the Company recorded the following impairment
charges to adjust the carrying values of such entities to their estimated
fair market values based on appraisals and/or analyses of discounted future
operating cash flows from these entities:
Write-down of property and equipment $34,516,000
Write-down of intangible assets 22,794,000
-----------
$57,310,000
===========
In conjunction with the 1998 disposition of the Company's White Knight
industrial and Struble and Moffit divisions (Note 2), the Company recorded
additional impairment and other charges totaling $7.0 million to adjust the
carrying values of the net assets to their fair market value based upon
actual consideration received. The following charges were recorded:
Write-down of inventory (1) $ 900,000
Write-down of accounts receivable (2) 300,000
Write-down of property and equipment (3) 5,800,000
----------
$7,000,000
===========
(1) Included in cost of goods sold
(2) Included in selling, general and administrative expenses
(3) Included in impairment loss
In December, 1998, based upon revised estimated consideration to be
received from the disposition of the remainder of White Knight and the
Company's former corporate office, the Company recorded an additional
impairment loss of $1.6 million.
RESTRUCTURING CHARGES
During 1996, the Company approved a plan to consolidate and or dispose of
its noncore businesses and to consolidate certain of its administrative
functions and services (the "Restructuring"). As part of the Restructuring,
the Company recorded the following charges:
Write-down of intangible assets $2,623,000
Employee severance 1,113,000
Other 675,000
----------
$4,411,000
===========
In conjunction with the Restructuring, the Company recorded an impairment
loss of $2,623,000 relating to valuation adjustments on certain intangible
assets of the Company's noncore businesses to be sold. As a result of the
restructuring, certain long-lived assets of its Safewaste subsidiary,
primarily equipment, with a carrying value of $1,642,000 at December 31,
1996 were classified as held for sale. During 1997, the Company determined
that this equipment would be held for use and, accordingly, reclassified
this equipment into property and equipment in the consolidated balance
sheet. In conjunction with the August 11, 1998 disposition of Arden and
Abbeville, the Company disposed of this equipment (Note 2).
4. INVENTORIES
Inventories are summarized by major classification at December 31, 1998 and
1997 as follows:
1998 1997
Raw materials $16,959,000 $24,121,000
Work-in-process 1,747,000 4,456,000
Finished goods 21,864,000 25,901,000
----------- -----------
40,570,000 54,478,000
Less reserves for slow moving and
obsolete inventory 16,923,000 22,411,000
----------- -----------
$23,647,000 $32,067,000
=========== ===========
At December 31, 1998 and 1997, the Company's LIFO inventory is included as
a component of net assets held for sale.
At December 31, 1998 and 1997, net OREX inventory is approximately
$4,920,000 and $7,500,000, respectively.
5. LONG-TERM DEBT
The Credit Agreement
In conjunction with the August 30, 1996 Microtek merger, the Company
replaced its existing $24,500,000 Isolyser credit agreement and $17,000,000
Microtek credit agreement with a $45,000,000 credit agreement as amended
through March 20, 1998 between the Company and a Bank, consisting of a
$30,000,000 revolving credit facility through August 31, 1999 and a
$15,000,000 term loan facility (the "Credit Agreement"). In conjunction
with this replacement, the Company recorded an extraordinary loss of
$457,000 in 1996, net of a tax benefit of $332,000 relating to the
extinguishment of the former credit agreements
In conjunction with the dispositions (Note 2) the Company repaid
outstanding borrowings under the term loan facility plus interest and
terminated such facility and repaid a portion of the revolving credit
facility, plus interest. Outstanding borrowings under the term loan
facility were $12,388,000 at December 31, 1997.
The Credit Agreement contains certain restrictive covenants, including the
maintenance of certain financial ratios, earnings before interest, taxes,
depreciation and amortization ("EBITDA"), and net worth, and places
limitations on acquisitions, dispositions, capital expenditures, and
additional indebtedness. The Company also is not permitted to pay any
dividends. At December 31, 1998, the Company was not in compliance with the
EBITDA and net worth covenants and due to the pending sale of the Company's
former corporate office (Note 2) will not be in compliance with the
disposition covenant. These existing covenant violations were waived by the
Bank on March 22, 1999.
In connection with the waiver of these covenant violations, the Bank and
the Company amended the Credit Agreement to extend the maturity date of the
revolving credit facility to June 30, 2000 and revise certain covenants
including certain of the financial ratios, EBITDA, net worth and capital
expenditure. Additionally, the Company is required to reduce the December
31, 1998 outstanding revolving credit facility balance by $8.0 million by
September 30, 1999.
As amended, borrowings under the revolving credit facility are based on the
lesser of a percentage of eligible accounts receivable and inventory or
$28,000,000 less any outstanding letters of credit issued under the Credit
Agreement. Current additional borrowing availability under the facility at
December 31, 1998 was $2, 254,000. Revolving credit borrowings bear
interest, at the Company's option, at either the Alternate Base Rate, plus
an Interest Margin as defined ("Interest Margin") or LIBOR plus an Interest
Margin (9.0% at December 31, 1998). Outstanding borrowings under the
revolving credit facility were $23,119,000 and $24,274,000 at December 31,
1998 and 1997, respectively.
The Credit Agreement provides for the issuance of up to $3,000,000 in
letters of credit. Outstanding letters of credit at December 31, 1998 were
$97,000. The Credit Agreement also provides for a fee of .25% per annum on
the unused commitment, an annual collateral monitoring fee of $50,000, and
an outstanding letter of credit fee of up to 2% per annum. The Company is
also subject to prepayment penalties through August, 1999 equal to 1% of
the amount of the aggregate commitment terminated or reduced, as defined.
Borrowings under the Credit Agreement are collateralized by the Company's
accounts receivable, inventory, property and equipment, and general
intangibles, as defined, and are guaranteed by the Company.
Other Long-Term Debt
As a result of the Microtek merger, the Company is obligated under certain
long-term notes payable, relating primarily to Microtek acquisitions, which
aggregated $3,051,000 and $4,051,000 at December 31, 1998 and 1997,
respectively. These obligations bear interest at rates ranging from 6.09%
to 9.5% and mature through November 2000. Two of the acquisition notes
payable aggregating $2,760,000 and $3,490,000 at December 31, 1998 and
1997, respectively, are subordinated to the Credit Agreement.
As a result of the White Knight acquisition, the Company is obligated under
certain long-term notes payable and capital leases which aggregated
$1,836,000 at December 31, 1997, and were included as a component of net
assets held for sale. One of these obligations related to a $1,284,000 7 %
note payable to a customer to be settled by trade discounts to be received
on purchases of White Knight products through January, 2000 at which time
the note payable and any accrued interest terminates. During 1996, this
customer was acquired by a competitor of the Company and has subsequently
discontinued its purchases of White Knight products. The Company believes
that this customer will no longer purchase White Knight products and,
accordingly, recorded an extraordinary gain of $1,404,000 in 1998, relating
to the extinguishment of this note payable plus accrued interest. Another
of these obligations relates to a $415,000 8% note payable due in August,
1999. The remaining $26,000 relates to capital lease obligations due
through August 2002, and are included as a component of net assets held for
sale at December 31, 1998.
During 1998 and 1997 the Company acquired certain equipment under capital
leases aggregating $277,000 and $243,000 at December 31, 1998 and 1997,
respectively.
At December 31, 1998, aggregate maturities of long-term debt, including
$26,000 as a component of net assets held for sale and amounts due under
capital leases, are summarized below:
1999 $ 9,405,000
2000 18,325,000
2001 537,000
2002 520,000
-----------
$28,787,000
===========
The carrying value of long-term debt at December 31, 1998 and 1997
approximates fair value based on interest rates that are believed to be
available to the Company for debt with similar prepayment provisions
provided for in the existing debt agreements.
6. LEASES
The Company leases office, manufacturing, and warehouse space, and
equipment under operating lease agreements expiring through 2004. Rent
expense was $2,849,000, $2,595,000, and $2,549,000 in 1998, 1997, and 1996,
respectively. At December 31, 1998, minimum future rental payments under
these leases are as follows:
1999 $2,309,000
2000 1,996,000
2001 1,840,000
2002 1,510,000
2003 1,284,000
Thereafter 579,000
----------
Total minimum payments $9,518,000
===========
The Company may, at its option, extend certain of its office,
manufacturing, and warehouse space lease terms through various dates.
7. INCOME TAXES
The income tax provision (benefit) is summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 349,000
State $ 80,001 67,000
Foreign $540,227 274,330 179,000
-------- -------- -----------
540,277 354,331 595,000
Deferred:
Federal (1,039,000)
State (195,000)
(1,234,000)
Income tax benefit related to extraordinary item (332,000)
-------- -------- -----------
Total income tax provision (benefit) $540,227 $354,331 $ (971,000)
======== ======== ===========
</TABLE>
The income tax provision (benefit) allocated to continuing operations using
the federal statutory tax rate differs from the actual income tax provision
(benefit) as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate $(6,017,000) (34)% $(31,807,000) (34)% $(7,016,000) (34)%
Items not deductible for tax
purposes, primarily
goodwill and merger costs 365,000 2% 8,595,000 9% 2,889,000 14%
Other, net 159,000 1% (12,000) -% 124,000 1%
Valuation allowance 6,033,000 34% 23,578,000 25% 3,372,000 16%
----------- ------ ------------ ------- ----------- =======
$540,000 3% $ 354,000 -% $( 639,000) ( 3)%
=========== ====== ============ ======= =========== =======
</TABLE>
Deferred income taxes as of December 31, 1998 and 1997 are as follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred income tax assets (liabilities):
Allowance for doubtful accounts $ 361,000 $ 346,000
Inventory 8,305,000 10,367,000
Accrued expenses 753,000 1,210,000
Valuation allowance (9,419,000) (11,923,000)
----------- -----------
Net deferred income taxes - current
Operating loss carryforward 26,415,000 15,506,000
Capital loss carryforward 230,000 230,000
Intangible assets 177,000 1,284,000
Property and equipment 1,632,000 3,931,000
Credit carryforward 221,000 152,000
Accrued expenses 3,301,000 2,893,000
Other 122,000 122,000
Valuation allowance (32,098,000) (24,118,000)
----------- -----------
Net deferred income taxes - noncurrent 0 0
----------- -----------
Net deferred income taxes $ 0 $ 0
=========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Gross deferred income tax assets and liabilities equaled $41,517,000 and $0
respectively, at December 31, 1998 and $36,041,000 and $0, respectively, at
December 31, 1997.
During 1996, the Company increased the valuation allowance with respect to
deferred tax assets by $5,244,000 to $5,792,000. During 1997, the Company
increased their valuation allowance by $30,249,000 to $36,041,000. During
1998, the Company increased their valuation allowance by $5,476,000 to
$41,517,000.
At December 31, 1998, the Company has net operating loss carryforwards of
$77,693,000 which expire at various dates through 2018.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in routine litigation and proceedings in the
ordinary course of business. Management believes that pending litigation
matters will not have a material adverse effect on the Company's financial
position or results of operations.
In conjunction with the August 11, 1998 disposition of the Arden
manufacturing facility (Note 2) the Company entered into a product
financing arrangement with Thantex whereby the Company agreed to repurchase
2.6 million pounds of OREX fiber originally sold to Thantex for $0.45 per
pound, either as fiber or converted product, for $0.80 per pound ratably
over a four year period. Accordingly, the Company continues to record this
inventory at historical carrying value and has recorded a liability for the
repurchase price in the accompanying financial statements. The difference
between the repurchase price and the sale price to Thantex represents
deferred interest expense which will be recognized on a straight line basis
over a four year period.
9. SHAREHOLDERS' EQUITY
Preferred Stock - On April 24, 1994, the Company authorized, for future
issuance in one or more series or classes, 10,000,000 shares of no par
value preferred stock. On December 19, 1996, the Company allocated 500,000
of the authorized shares to a series of stock designated as Participating
Preferred Stock.
Common Stock and Warrants - In connection with the sale of 1,255,600 shares
of common stock at $3 per share in 1991, the Company issued currently
exercisable warrants to purchase, in whole or in part, 83,708 of its common
shares at $3 per share, subject to adjustment to prevent dilution. In
September 1995, warrants to purchase 41,854 shares of common stock were
exercised. On March 7, 1996, the remaining warrants were exercised.
Stock Options - On April 28, 1992, the Company adopted the Stock Option
Plan (the "Plan") which, as amended, authorizes the issuance of up to
4,800,000 shares of common stock to certain employees, consultants, and
directors of the Company under incentive and/or nonqualified options and/or
alternate rights. An alternate right is defined as the right to receive an
amount of cash or shares of stock having an aggregate market value equal to
the appreciation in the market value of a stated number of shares of the
Company's common stock from the alternate right grant date to the exercise
date. The Plan Committee may grant alternate rights in tandem with an
option, but the grantee must exercise either the right or the option.
Options and/or rights under the Plan may be granted through April 27, 2002
at prices not less than 100% of the market value at the date of grant.
Options and/or rights become exercisable based upon a vesting schedule
determined by the Plan Committee and become fully exercisable upon a change
in control, as defined. Options expire not more than ten years from the
date of grant and alternate rights expire at the discretion of the Plan
Committee. Through December 31, 1998, no alternate rights had been issued.
The Company has also granted nonqualified stock options to certain
employees, nonemployees, consultants, and directors to purchase shares of
the Company's common stock outside of the Plan. Options granted expire in
various amounts through 2001.
In April 1995, the Company adopted a Director Stock Option Plan, which
authorizes the issuance of up to 30,000 shares of common stock. At December
31, 1998, currently exercisable options for 18,000 shares were outstanding
under this plan.
A summary of option activity during the three years ended December 31, 1998
is as follows:
<PAGE>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
Outstanding - December 31, 1995 4,032,999 $ 5.60
Granted 1,875,016 7.95
Exercised (983,165) 3.19
Canceled (1,111,819) 11.50
---------- --------
Outstanding - December 31, 1996 3,813,031 5.65
Granted 642,000 4.62
Exercised (213,705) 3.62
Canceled (346,022) 6.27
---------- --------
Outstanding - December 31, 1997 3,895,304 5.54
Granted 2,826,417 2.51
Exercised
Canceled (2,841,554) 5.81
---------- --------
Outstanding - December 31, 1998 3,880,167 3.13
========== ========
On February 25, 1998, the Company permitted option holders to exchange all
of their stock options having an exercise price at or above $3.49 for a
lesser number of replacement stock options at a new exercise price equal to
the then current fair market value of a share of Common Stock. The exchange
program was made available to all then current employees except one
executive officer. As a result 1,379,732 options at a weighted-average
exercise price of $7.13 were exchanged for 1,034,662 options with a
weighted-average exercise price of $3.37.
During 1996, the Company repriced 904,000 options with a weighted-average
exercise price of $15.32 to $7.125.
The following table summarizes information pertaining to options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$0.83 - $3.79 3,371,366 4.7 $ 2.51 2,040,489 $ 2.68
4.00 - 4.60 38,000 8.0 4.01 12,500 4.04
4.64 - 9.00 386,801 2.6 6.05 371,629 6.03
13.13 - 18.00 84,000 2.0 14.40 57,332 14.38
----------- -------- ------- ----------- --------
3,880,167 4.4 3.13 2,481,950 3.46
=========== ======== ======= =========== ========
</TABLE>
At December 31, 1998 and 1997, exercisable options were 2,481,950 and
2,969,153, respectively, at weighted average exercise prices of $3.46 and
$5.20, respectively.
The fair value of options granted in 1998, 1997 and 1996 were $1.48, $2.44
and $6.93, respectively, using the Black Sholes option pricing model with
the following assumptions:
1998 1997 1996
Dividend yield % 0.00 0.00 0.00
Expected volatility % 0.48 0.44 0.54
Risk free interest rate % 0.05 0.07 0.06
Forfeiture rate % 0.16 0.03 0.03
Expected life, in years 7.08 6.09 4.05
In April 1995, the Company adopted an Employee Stock Purchase Plan ("ESPP")
which authorizes the issuance of up to 300,000 shares of common stock.
Under the ESPP, eligible employees may contribute up to 10% of their
compensation toward the purchase of common stock at each year-end. The
employee purchase price is derived from a formula based on fair market
value of the Company's common stock. Through December 31, 1997 the Company
had issued 189,615 shares under the ESPP. During 1998 the Company granted
the remaining 110,385 rights to purchase shares. Such shares were issued in
January 1999 and the ESPP was terminated. Pro forma compensation costs
associated with the rights granted under the ESPP is estimated based on
fair market value. This plan was terminated in December 1998.
The Company applies APB 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock-based compensation
plans. Effective January 1, 1996, the Company adopted the disclosure-only
provisions of SFAS 123, Accounting for Stock-Based Compensation. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the
method of SFAS 123, the Company's pro forma net loss and basic and diluted
net loss per share for 1997, 1996, and 1995 would have been as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net loss $ (20,548,436) $ (94,796,000) $ (24,577,000)
============== ============== ==============
Net loss per share - Basic and Diluted $ (0.51) $ (2.41) $ (0.63)
============= ============== ==============
</TABLE>
At December 31, 1998 and 1997, shares available for future grants are
829,000 and 857,000 under the Company option plans and ESPP.
Employee Stock Ownership Plan - Effective December 1, 1992, Microtek
adopted an Employee Stock Ownership Plan ("ESOP") to which the Company has
the option to contribute cash or shares of the Company's common stock.
During 1993, the Company contributed 16,500 common shares to the ESOP. On
November 29, 1993, the Company reserved an additional 148,500 common shares
at $3.64 per share for issuance to the ESOP. As consideration for the
148,500 reserved shares, the ESOP issued a $540,000 purchase loan (the
"ESOP Loan") to the Company, payable in equal annual installments of
$79,000, including interest at 6% commencing November 29, 1994. 16,500
reserved shares have been released during each of 1998, 1997, and 1996,
resulting in compensation expense of $27,616, $39,000, and $136,000,
respectively. At December 31, 1998, 66,000 common shares with a market
value of $70,125 remain unearned under the ESOP.
The Company's contributions to the ESOP each plan year will be determined
by the Board of Directors provided that for any year in which the ESOP Loan
remains outstanding, the contributions by the Company may not be less than
the amount needed to provide the ESOP with sufficient cash to pay
installments under the ESOP Loan. The Company contributed $79,392 to the
ESOP during each of 1998, 1997, and 1996.
The unearned shares reserved for issuance under the ESOP are accounted for
as a reduction of shareholders' equity. The ESOP Loan is not recorded in
the accompanying financial statements.
Shareholder Rights Plan - On December 19, 1996, the Company adopted a
shareholder rights plan under which one common stock purchase right is
presently attached to and trades with each outstanding share of the
Company's common stock. The rights become exercisable and transferable,
apart from the common stock, ten days after a person or group, without the
Company's consent, acquires beneficial ownership of, or the right to obtain
beneficial ownership of, 15% or more of the Company's common stock or
announces or commences a tender offer or exchange offer that could result
in 15% ownership. Once exercisable, each right entitles the holder to
purchase one one-hundredth of a share of Participating Preferred Stock at a
price of $60.00 per one one-hundredth of a Preferred Share, subject to
adjustment to prevent dilution. The rights have no voting power and, until
exercised, no dilutive effect on net income per common share. The rights
expire on December 31, 2006, and are redeemable at the discretion of the
Board of Directors at $.001 per right.
If a person acquires 15% ownership, except in an offer approved by the
Company under the shareholder rights plan, then each right not owned by the
acquirer or related parties will entitle its holder to purchase, at the
right's exercise price, common stock or common stock equivalents having a
market value immediately prior to the triggering of the right of twice that
exercise price. In addition, after an acquirer obtains 15% ownership, if
the Company is involved in certain mergers, business combinations, or asset
sales, each right not owned by the acquirer or related persons will entitle
its holder to purchase, at the right's exercise price, shares of common
stock of the other party to the transaction having a market value
immediately prior to the triggering of the right of twice that exercise
price.
In September 1997, the Company amended its shareholder rights plan to
include a provision whereby it may not be amended and rights may not be
redeemed by the Board of Directors for a period of one year or longer. The
provision only limits the power of a new Board in those situations where a
proxy solicitation is used to evade protections afforded by the shareholder
rights plan. A replacement Board retains the ability to review and act upon
competing acquisition proposals.
10. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In November 1997, the Emerging Issues Task Force ("EITF") issued EITF
97-13, Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Process that Combines Process Reengineering and
Information Technology Transformation, which requires that the cost of
business process reengineering activities that are part of a project to
acquire, develop or implement internal use software, whether done
internally or by third parties, be expensed as incurred. Previously, the
Company capitalized these costs as system development costs.
The change, effective in the fourth quarter of 1997, resulted in a
cumulative charge of $800,000, net of tax of $0. No restatement of prior
year financial statements is required, and the effect of this change on the
current year and prior year quarters is not material.
11. SIGNIFICANT CUSTOMERS AND CERTAIN CONCENTRATIONS
The Company had 22%, 20%, and 17% of the Company's sales to one customer
for the years ended December 31, 1998, 1997, and 1996, respectively, and
accounts receivable from this customer of $2,472,000, $2,349,000, and
$2,688,000 at December 31, 1998, 1997, and 1996, respectively.
Included in the Company's consolidated balance sheet at December 31, 1998
are the net assets of the Company's manufacturing facilities located in the
United Kingdom, Mexico, and the Dominican Republic, which total $6,814,000.
Only the manufacturing facility in the United Kingdom sells products to
external customers. Sales from the United Kingdom were $4,460,000,
$4,471,000, and $5,396,000 in 1998, 1997, and 1996, respectively.
At December 31, 1998, approximately 13% of the Company's labor force is
covered under three collective bargaining agreements, none of which expire
within one year.
12. RETIREMENT PLANS
The Company maintains a 401(k) retirement plan covering employees who meet
certain age and length of service requirements, as defined. The Company
matches a portion of employee contributions to the plans either in cash or
shares of the Company's common stock. Vesting in the Company's matching
contributions is based on years of continuous service. The Company
contributed $501,000, $510,000, and $140,000, and to the plan during 1998,
1997, and 1996, respectively.
13. UNAUDITED QUARTERLY FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<PAGE>
<TABLE>
<CAPTION>
Year Ended Quarter
-----------------------------------------------------------------------------
DECEMBER 31, FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
1998
Net sales $ 41,230 $ 38,874 $ 36,112 $ 32,610
Gross profit 10,642 8,742 (1) 9,973 8,350
Loss before extraordinary
items (1,287) (9,260)(2) (2,056) (7,037) (3)
Net loss (1,287) (9,260) (2,056) (5,633) (4)
Net loss per common share -
Basic & Diluted (0.03) (0.23) (0.05) (0.15)
1997
Net sales 40,003 42,434 41,877 35,626
Gross profit 9,157 9,472 (4,615) (5) 3,832
Loss before cumulative effect of
change in accounting principle (3,910) (3,566) (17,177) (68,450) (6)
Net loss (3,910) (3,566) (17,177) (69,250) (7)
Net loss per common share -
Basic & Diluted (0.10) (0.09) (0.44) (1.76)
</TABLE>
1 Includes $900,000 of inventory write-downs.
2 Includes $6.5 million of impairment and other charges (Note 3).
3 Includes $2.1 million of impairment charges (Note 3).
4 Includes an extraordinary gain of $1.4 million net of tax of $0, relating
to the extinguishment of debt (Note 5).
5 Includes $13.0 million of excess and/or obsolete OREX inventory
write-downs.
6 Includes $57.3 million of impairment charges (Note 3).
7 Includes a cumulative charge of $800,000, net of tax of $0, relating to the
implementation of EITF 97-13 (Note 10).
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT COSTS AND CHARGED TO
BEGINNING (REVERSED FROM) EXPENSES DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES (NOTE 1) (NOTE 2) END OF PERIOD
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful trade accounts
receivable $ 1,175,587 $ 145,092 $ 381,390 $ - $ 1,702,069
=========== =========== ========== =========== ============
Reserve for obsolete and slow-moving
inventories $ 612,597 $ 9,479,426 $ - $ (51,180) $ 10,040,843
=========== =========== ========== =========== ============
-
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful trade accounts
receivable $ 1,702,069 $ 375,442 $ - $ (227,419) $ 1,850,092
=========== =========== ========== =========== ============
Reserve for obsolete and slow-moving
inventories $10,040,843 $14,694,250 $ - $ 1,197,778 $ 23,537,315
=========== =========== ========== =========== ============
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful trade accounts
receivable $ 1,850,092 $ 290,647 $ - $ 322,790 $ 1,817,949
=========== =========== ========== =========== ============
Reserve for obsolete and slow-moving
inventories $23,537,315 $ 43,215 $ - $ 5,593,201 $ 17,987,329
=========== =========== ========== =========== ============
</TABLE>
Note 1: Represents allowance for doubtful accounts and reserves for
slow-moving and obsolete inventories of acquired businesses at date of
acquisition.
Note 2: "Deductions" represent amounts written off during the period
less recoveries of amounts previously written off.
Note 3: Allowance for doubtful accounts include amounts classified as
net assets held for sale.
