SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): March 9, 2001
ISOLYSER COMPANY, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Georgia
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(State or Other Jurisdiction of Incorporation)
0-24866 58-1746149
--------------------------------- ------------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
4320 International Boulevard, Norcross, Georgia 30093
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(Address of Principal Executive Offices (Zip Code)
(770) 806-9898
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(Registrant's Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
Item 2. Acquisition or Disposition of Assets
On March 9, 2001, Microtek Medical, Inc. ("Microtek"), a wholly owned
subsidiary of Isolyser Company, Inc. ("Isolyser"), acquired from Deka Medical,
Inc. ("Deka"), substantially all of the assets (the "Drape Assets") of Deka used
or held for use in Deka's business of manufacturing, marketing and selling
drapes for medical equipment and patients. On February 9, 2001, Microtek
acquired from Deka substantially all of the assets (the "Clean-Op Assets") of
Deka used or held for use in Deka's business of manufacturing, marketing and
selling drapes and related supplies packaged as clean-op kits for surgical
procedures (the acquisition of the Drape Assets and the Clean-Op Assets is
hereafter referred to as the "Deka Acquisition"). Deka is not an "affiliate" of
Isolyser within the meanings of the Securities Act of 1933, as amended. Subject
to post-closing adjustments, the purchase price paid in the Deka Acquisition was
approximately $11.9 million, including the assumption of certain designated
liabilities. As adjusted through October 9, 2001, the purchase price is
approximately $11.6 million. The purchase price was negotiated at arms' length.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired:
The following financial statement information of Deka Medical, Inc. and
subsidiary ("Deka") is filed as part of this current report:
Independent Auditors' Report of KPMG LLP
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000 and 1999
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2000 and 1999
Notes to the Consolidated Financial Statements
(b) Pro Forma Financial Information:
The following unaudited pro forma financial information is filed as part of
this current report:
Introduction to Unaudited Pro Forma Information
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December
31, 2000
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 2000
Notes to the Pro Forma Condensed Consolidated Financial Statements
2
(c) Exhibits:
2.1* Asset Purchase Agreement dated as of February 9, 2001, among
Microtek, Deka and certain stockholders of Deka.
2.2* First Amendment to Asset Purchase Agreement dated as of
February 23, 2001, among Microtek, Deka and certain
stockholders of Deka.
2.3* Second Amendment to Asset Purchase Agreement dated as of
March 9, 2001, among Microtek, Deka and certain stockholders
of Deka.
23.1 Consent of KPMG LLP
--------------------------------------------------
*Incorporated by reference to Isolyser's current report dated March 9,
2001.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be duly signed on its behalf by the
undersigned hereunto duly authorized.
ISOLYSER COMPANY, INC.
By: /s/ R. G. Wilson
-----------------------------------------
R. G. Wilson, Chief Financial Officer
Dated: October 9, 2001
4
Independent Auditors' Report
The Board of Directors
DEKA Medical, Inc.:
We have audited the accompanying consolidated balance sheets of DEKA Medical,
Inc. and subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our report dated May 9, 2001, we expressed an opinion on the Company's 2000
and 1999 consolidated financial statements qualified for the effects of such
adjustments, if any, as might have been determined to be necessary had we been
able to examine sufficient evidence regarding the Company's valuation of its
inventories. Since that date, the Company has provided us with such evidence and
we were able to satisfy ourselves as to the valuation of inventories. The
Company has restated its 2000 and 1999 consolidated financial statements based
on the additional evidence. The effect of the restatement decreased inventories
$243,384 and $200,000 at December 31, 2000 and 1999, respectively. Accordingly,
our present opinion on the 2000 and 1999 consolidated financial statements, as
presented herein, is different from that expressed in our previous report.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DEKA Medical, Inc.
and subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in note 3 to the
financial statements, the Company has incurred significant losses from
operations during 2000 and 1999, has a net capital deficiency and, in February
and March 2001, sold substantially all of its assets to an unrelated third
party. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Jackson, Mississippi
August 2, 2001
5
DEKA MEDICAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2000 and 1999
ASSETS 2000 1999
------------------ ------------------
Current assets:
Cash $ 85,377 123,816
Receivables:
Trade accounts 4,585,943 3,038,741
Other 48,012 63,797
------------------ ------------------
4,633,955 3,102,538
Less allowance for doubtful receivables (347,366) (130,084)
------------------ ------------------
Net receivables 4,286,589 2,972,454
------------------ ------------------
Inventories 4,560,848 4,766,811
Other current assets 5,317 87,336
------------------ ------------------
Total current assets 8,938,131 7,950,417
------------------ ------------------
Property and equipment, net 1,834,395 2,291,125
Other assets, net 2,508,906 12,104,569
------------------ ------------------
$ 13,281,432 22,346,111
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 18,904,672 14,725,635
Trade accounts payable 2,434,174 2,258,449
Accrued expenses 568,947 687,008
------------------ ------------------
Total current liabilities 21,907,793 17,671,092
------------------ ------------------
Stockholders' equity (deficit):
Series A preferred stock, par value $.01 per share. Authorized
140,000 shares; issued and outstanding 80,000 shares 800 800
Series B preferred stock, par value $.01 per share. Authorized
3,400,000 shares; issued and outstanding 2,724,701 shares
at December 31, 2000 and 2,442,055 shares at
December 31, 1999 27,247 24,421
Preferred stock, $.01 par value. Authorized 2,460,000 shares;
none issued -- --
Common stock, par value $.01 per share. Authorized 20,000,000
shares; issued and outstanding 927,647 shares 9,276 9,276
Additional paid in capital 17,193,855 15,696,677
Accumulated deficit (25,857,539) (11,056,155)
------------------ ------------------
Total stockholders' equity (deficit) (8,626,361) 4,675,019
------------------ ------------------
Commitments and contingencies $ 13,281,432 22,346,111
================== ==================
See accompanying notes to consolidated financial statements.
6
DEKA MEDICAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2000 and 1999
2000 1999
--------------------- -----------------
Net sales $ 23,245,093 9,018,651
Cost of sales 22,667,536 8,884,732
--------------------- -----------------
Gross profit 577,557 133,919
--------------------- -----------------
Selling, general and administrative expenses 3,975,567 3,833,701
Amortization of goodwill 608,677 102,538
Amortization of patent cost -- 23,380
Loss on impairment of assets 8,970,000 --
Loss on impairment of patent -- 311,760
--------------------- -----------------
Total operating expenses 13,554,244 4,271,379
--------------------- -----------------
Loss from operations (12,976,687) (4,137,460)
--------------------- -----------------
Other expenses:
Interest, net 1,776,476 461,741
Amortization of deferred loan costs 48,221 46,991
--------------------- -----------------
Total other expenses 1,824,697 508,732
--------------------- -----------------
Net loss $ (14,801,384) (4,646,192)
===================== =================
See accompanying notes to consolidated financial statements.
7
DEKA MEDICAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2000 and 1999
Series A Series B Additional
Preferred Preferred Common paid in Accumulated
stock stock stock capital deficit Total
----------- ------------ ----------- ------------ ------------- ------------
Balance at December 31,1998 $ 800 7,575 9,276 8,812,725 (6,409,963) 2,420,413
Issuance of 1,300,167 shares of
Series B preferred stock -- 13,002 -- 6,887,796 -- 6,900,798
Series B preferred stock dividend,
384,388 shares -- 3,844 -- (3,844) -- --
Net loss -- -- -- -- (4,646,192) (4,646,192)
----------- ------------- ----------- ------------- ------------ ------------
Balance at December 31, 1999 800 24,421 9,276 15,696,677 (11,056,155) 4,675,019
Net loss -- -- -- -- (14,801,384) (14,801,384)
Issuance of 282,646 shares of Series B
preferred stock -- 2,826 -- 1,497,178 -- 1,500,004
----------- ------------- ------------ ------------ ------------ -------------
Balance at December 31, 2000 $ 800 27,247 9,276 17,193,855 (25,857,539) (8,626,361)
=========== ============= ============ ============= ============ =============
See accompanying notes to consolidated financial statements.
8
DEKA MEDICAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2000 and 1999
2000 1999
------------------ ----------------
Cash flows from operating activities:
Net loss $ (14,801,384) (4,646,192)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,238,646 600,082
Loss on impairment of assets 8,970,000 --
Issuance of notes payable for interest payments 498,451 20,727
Loss on impairment of patent -- 311,760
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (1,314,135) (211,460)
Inventories 205,963 490,919
Other current assets 82,019 (71,005)
Accounts payable and accrued expenses 57,664 826,585
----------------- ----------------
Net cash used in operating activities (5,062,776) (2,678,584)
----------------- ----------------
Cash flows from investing activities:
Additions to property and equipment (125,018) (877,547)
Net cash used in acquisitions -- (11,027,000)
Change in other assets (3,100) 696
------------------ ----------------
Net cash used in investing activities (128,118) (11,903,851)
------------------ ----------------
Cash flows from financing activities:
Net borrowings under revolving credit agreement 2,714,484 3,889,536
Proceeds from notes payable 1,500,000 6,200,000
Principal payments on notes payable (533,898) (1,166,927)
Additions to deferred loan costs (28,135) (74,386)
Issuance of preferred stock 1,500,004 5,700,798
----------------- ----------------
Net cash provided by financing activities 5,152,455 14,549,021
----------------- ----------------
Net decrease in cash (38,439) (33,414)
Cash at beginning of year 123,816 157,230
----------------- ----------------
Cash at end of year $ 85,377 123,816
================= ================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,301,000 407,000
================= ================
Debt issued related to acquisition $ -- 1,200,000
================= ================
Preferred stock issued related to acquisition $ -- 1,200,000
================= ================
Debt issued to finance interest payments $ 498,451 20,727
================= ================
See accompanying notes to consolidated financial statements.
9
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(1) Organization and Consolidation
DEKA Medical, Inc. (DEKA) (formerly Mask Industries, Inc.) a Florida
corporation, was incorporated in 1991 and was acquired by its present
owners on January 31, 1997. DEKA and its wholly-owned subsidiary, DEKA
Medical Limited, Inc., (collectively, the "Company") design, manufacture
and sell a broad range of surgical and medical supplies primarily
throughout the United States and Europe.
The consolidated financial statements include the accounts and results of
operations of DEKA Medical, Inc. and its wholly-owned subsidiary. All
significant intercompany transactions and balances have been eliminated in
consolidation.
(2) Summary of Significant Accounting Policies
(a) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
(b) Property and Equipment
Property and equipment are stated at cost. Depreciation of equipment
is calculated using the straight-line method over the estimated useful
lives of the assets.
(c) Other Assets
Goodwill, which represents the excess of the purchase price over the
estimated fair values of the net assets acquired, is amortized over
twenty years using the straight-line method. Deferred loan costs are
being amortized over the terms of the related indebtedness using the
straight-line method which does not differ materially from the
interest method.
The patent was recorded at cost and was being amortized over its
remaining legal life using the straight-line method. During 1999, the
Company determined that the patent no longer had any future value;
accordingly, an impairment loss was recorded.
(d) Long-Lived Assets
Long-lived assets and certain identifiable intangibles to be held and
used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Additionally, long-lived assets and certain
identifiable intangibles to be disposed of are reported at the lower
of carrying amount or fair value less cost to sell. At December 31,
2000, the Company recorded an impairment loss of $8,970,000 related to
the sale of substantially all of its assets in February and March 2001
(see note 15). The impairment loss adjusted property, equipment and
goodwill to estimated fair value less cost to sell.
10
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(e) Research and Development
Research and development expenditures are charged to expense as
incurred and are included in selling, general and administrative
expenses. Research and development expenses were not material for the
years ended December 31, 2000 and 1999.
(f) Stock Based Compensation
The Company accounts for its stock option plan in accordance with the
provisions of Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock Based Compensation." This standard
defines a fair value based method of accounting for employee stock
options or similar equity instruments. Companies may elect either to
recognize related compensation cost by adopting the fair value method
or to use the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and provide supplemental disclosures as required
under SFAS 123. The Company has elected to follow the requirements of
APB 25, and accordingly there is no effect for the Company's stock
option plan on the results of operations.
(g) Revenue Recognition
Revenue is recognized when goods are shipped and title and risk of
ownership have passed. The Company allows goods to be returned if they
do not meet the customer's specifications. An allowance is recorded
for such returns.
(h) Income Taxes
The Company uses the asset and liability method in accounting for
income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases, and for operating losses and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the statement of operations in the period that
includes the enactment date.
11
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(i) Use of Estimates
These financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America. Accordingly, management has made 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.
Estimates that are particularly susceptible to significant change in
the near term relate primarily to the reserve for obsolete and
slow-moving inventories and the allowance for doubtful accounts.
(3) Liquidity
As reflected in the accompanying consolidated financial statements, the
Company has incurred significant losses in 2000 and 1999 and has a net
stockholders' deficit as of December 31, 2000. The Company sold
substantially all of its assets in February and March 2001 and utilized the
proceeds to reduce notes payable. As a result of the sale, the Company does
not plan to continue its operations. Accordingly, these matters raise
substantial doubt about the Company's ability to continue as a going
concern.
(4) Acquisition
On December 15, 1999, the Company purchased certain assets and assumed
certain liabilities of the Bemiss-Jason Medical division from Bemiss-Jason
Corporation, a California corporation, in a transaction accounted for using
the purchase method of accounting. The purchase price consisted of
$10,800,000 in cash, a subordinated note payable of $1,200,000, 226,116
shares of the Company's Series B Preferred Stock and warrants for the
purchase of 133,803 shares of the Company's common stock.
12
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The fair value of assets and liabilities purchased or assumed at the
acquisition date follows:
Accounts receivable and inventories $ 3,269,000
Equipment 650,000
Current liabilities (1,250,000)
-----------------
Fair value of tangible net assets 2,669,000
Goodwill 10,531,000
-----------------
Purchase price $ 13,200,000
=================
Consideration paid for acquisition:
Cash $ 10,800,000
Note payable 1,200,000
Preferred stock and warrants 1,200,000
-----------------
$ 13,200,000
=================
The purchase price for the acquisition was allocated to the assets and
liabilities acquired based on their respective estimated fair values.
Direct costs of the acquisitions, such as legal fees and closing costs, are
included in the allocation of costs described above. The results of
operations of the acquired business are included in the Company's
operations from the date of acquisition.
(5) Inventories
A summary of inventories follows:
December 31,
-------------------------------------
2000 1999
----------------- -----------------
Raw materials $ 3,207,690 2,317,803
Finished goods 2,383,158 3,519,008
----------------- -----------------
5,590,848 5,836,811
Reserve for obsolete and slow-moving
inventories (1,030,000) (1,070,000)
----------------- -----------------
$ 4,560,848 4,766,811
================= =================
13
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(6) Property and Equipment
A summary of property and equipment follows:
December 31,
Estimated --------------------------------------
useful life 2000 1999
------------------ ------------------- -----------------
Machinery and equipment 3 - 5 years $ 1,996,896 1,854,221
Furniture, fixtures and equipment 3 - 5 years 628,838 548,900
Leasehold improvements 8 years 506,876 373,945
Building improvements 5 years 171,457 171,457
Construction in progress -- -- 221,598
------------------- -----------------
3,304,067 3,170,121
Less accumulated depreciation (1,469,672) (878,996)
------------------- -----------------
$ 1,834,395 2,291,125
=================== =================
(7) Other Assets
A summary of other assets follows:
December 31,
-------------------------------------
2000 1999
------------------ -----------------
Goodwill $ 3,373,533 12,335,541
Deferred loan costs 153,889 125,754
Other -- 6,047
------------------ -----------------
3,527,422 12,467,342
Less accumulated amortization (1,018,516) (362,773)
------------------ -----------------
$ 2,508,906 12,104,569
================== =================
(8) Notes Payable
A summary of notes payable follows:
December 31,
-------------------------------------
2000 1999
------------------ -----------------
Notes payable to commercial bank (i) $ 10,078,714 7,364,230
Notes payable to commercial bank (ii) 3,406,780 3,440,678
Subordinated notes payable (iii) 4,419,178 3,920,727
Demand notes payable to shareholders, interest at 19% 1,000,000 --
------------------ -----------------
Total notes payable $ 18,904,672 14,725,635
================== =================
14
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(i) In December 2000, the Company amended its credit agreement with a
commercial bank under a revolving line of credit. Maximum outstanding
advances through February 15, 2001 shall not exceed $10,100,000 and
decrease to $8,500,000 in March 2001. Amounts are generally made
available under this arrangement based on the sum of 85% of eligible
accounts receivable and 50% of eligible inventories. Interest is
payable at a variable rate (the selection of which is at the Company's
discretion) and may be changed periodically. At December 31, 2000, the
interest rate was 9.50%. The Company is required to pay commitment
fees at an annual percentage rate of .5% on the average daily unused
amount of the line of credit. These fees were not significant for the
years ended December 31, 2000 and 1999. The due date was accelerated
to March 2001.
(ii) This note was amended in 2000 and the Company received an additional
advance of $500,000. This note bears interest at a variable rate (the
selection of which is at the Company's discretion) and may be changed
periodically. At December 31, 2000, the interest rate was 9.50%. The
due date was accelerated to March 2001.
(iii)In connection with the Bemiss-Jason acquisition discussed in note 4,
the Company issued subordinated notes payable in the amount of
$3,900,000, $1,200,000 of which were issued to the previous owners of
Bemiss-Jason. The interest rate is 12%. Through June 30, 2001,
additional notes will be issued quarterly in an amount equal to the
interest that has accrued. Thereafter, interest is to be paid
quarterly in cash. Principal payments are due in eight equal quarterly
installments beginning in December 2004.
The notes payable to a commercial bank are secured by substantially all of
the Company's assets and the personal guaranties of certain of the
Company's shareholders and contains restrictive covenants which, among
other things, (1) require the Company to maintain stated levels of
earnings, interest coverage, debt coverage and net worth, (2) limit capital
expenditures, indebtedness (other than that under the agreement) and lease
obligations to certain levels, and (3) restrict most dividend payments. The
subordinated notes payable also contain similar restrictive covenants. At
December 31, 2000 and 1999, the Company was not in compliance with its debt
covenants and therefore all of the debt was due on demand and is classified
as current in the accompanying 2000 and 1999 consolidated financial
statements (see note 15).
15
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(9) Income Taxes
The Company did not recognize any income tax benefit in the accompanying
consolidated statements of operations. This treatment differs from the
benefit computed by applying the Federal income tax rate of 34 percent to
total pre-tax loss as a result of the following:
2000 1999
------------------ -----------------
Computed "expected" tax benefit $ 5,032,471 1,579,705
(Increase) decrease in tax benefit resulting from:
State income taxes 486,900 151,800
Change in beginning-of-year balance of the
valuation allowance for deferred tax assets (5,511,000) (1,724,600)
Other (8,371) (6,905)
------------------ -----------------
$ -- --
================== =================
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities follow:
December 31,
-------------------------------------
2000 1999
------------------ -----------------
Deferred tax assets:
Accounts receivable, due to allowances for
doubtful accounts and returns $ 130,000 48,500
Deferred compensation, principally due to
accrual for financial reporting purposes 8,000 48,500
Inventory reserve 384,000 399,000
Impairment loss recorded for financial
reporting purposes 3,346,000 --
Tax benefit of net operating losses available
to offset future taxable income 5,883,000 3,669,000
------------------ -----------------
Total gross deferred tax assets 9,751,000 4,165,000
Less valuation allowance (9,647,000) (4,136,000)
------------------ -----------------
Net deferred tax asset 104,000 29,000
------------------ -----------------
Deferred tax liability - goodwill, due to different
amortization period (104,000) (29,000)
------------------ -----------------
Net deferred taxes $ -- --
================== =================
The valuation allowance for deferred tax assets as of December 31, 1999 was
$4,136,000. The net change in the total allowance during the year ended
December 31, 2000 totaled $5,511,000. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
16
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
tax planning strategies in making this assessment. Based upon recent
operating results and projections for future taxable income over the
periods in which deferred tax assets are deductible, management has
recorded a valuation allowance in an amount which reduces the net deferred
taxes to zero at December 31, 2000 and December 31, 1999. Subsequently
recognized tax benefits, if any, relating to the valuation allowance for
deferred tax assets as of December 31, 2000 will be reflected as an income
tax benefit and reported in the statement of operations.
At December 31, 2000, the Company has approximately $16,000,000 of unused
U.S. Federal and state operating loss carryforwards which will expire
between 2012 and 2020, if not utilized.
(10) Leases
Future minimum lease payments under operating leases that have initial or
remaining noncancelable terms in excess of one year as of December 31, 2000
follow:
Year ending
December 31,
-------------------
2001 $ 593,000
2002 436,000
2003 209,000
2004 209,000
2005 150,000
Thereafter 76,000
------------------
$ 1,673,000
==================
Rent expense during 2000 and 1999 approximated $734,000 and $516,000,
respectively.
(11) Business and Credit Concentrations
The Company's trade receivables are primarily concentrated with medical
supply dealers and distributors. The Company performs on-going credit
evaluations of its customers and generally does not require collateral on
trade receivables. The Company believes that trade receivables are well
diversified, thereby reducing potential credit risk, and that adequate
allowances are maintained for any uncollectible trade receivables.
(12) Capital Stock and Warrants
The Company has amended its charter to change its capital structure by
increasing the number of common shares it is authorized to issue to
20,000,000 and authorizing the issuance of up to 6,000,000 shares of
preferred stock of $.01 par value per share. The preferred stock may be
issued in one or more series as determined by the Company's board of
directors. The preferred shares are entitled to receive cash dividends at
the same rate per share as any dividends declared on common stock, have
voting rights, are convertible into common shares based on a formula price,
and have a preference in liquidation of $7.50 and $5.31 per share for
Series A shares and Series B shares, respectively. Holders of Series B are
senior to holders of Series A and common stock with respect to liquidation.
Holders of Series A are senior to holders of common stock with respect to
liquidation.
17
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
During 1999 the Company declared and issued a stock dividend on all
previously outstanding Series B shares in an amount required to effectively
reduce its issuance price to $5.31 per share.
The Company has warrants outstanding for the purchase of 434,860 shares of
the Company's common stock. The warrants, which are exercisable at $.01 per
share, are scheduled to expire in 2009. At the date of the issuance of the
warrants, the Company's management believed that the warrants had only a
minimal fair value; therefore, no value was assigned to the warrants.
(13) Stock Option Plan
The Company's board of directors has approved up to 300,000 shares of
common stock for issuance pursuant to incentive or nonqualified stock
options to be granted under the DEKA Medical, Inc. 1997 Stock Option Plan
(the "Plan"). The Company's board of directors may grant to employees,
directors and key consultants non-transferable options to purchase shares
of common stock for terms not longer than ten years (five years in the case
of incentive stock options granted to an individual who, at the time of the
grant, owns more than 10% of the total combined voting power of all classes
of stock of the Company), at prices to be determined by the Company's board
of directors, which may not be less than 100% of the fair market value of
the common stock on the date of grant (110% in the case of an individual
who, at the time of the grant of incentive stock options, owns more than
10% of the total combined voting power of all classes of stock of the
Company), in the case of incentive stock options under Section 422 of the
Internal Revenue Code which may be granted only to employees. Options
granted under the Plan may be exercisable in installments. Unless
terminated earlier, the Plan will terminate in 2007, and options granted
before that date will continue to be effective in accordance with their
terms. The aggregate fair market value of stock with regard to which
incentive stock options are exercisable by an individual for the first time
during any calendar year may not exceed $100,000 as of the date of the most
recent grant.
18
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Option activity during the years ended December 31, 2000 and 1999 is
summarized as follows:
Average
Number of option price
shares per share
------------------ -----------------
Balance at December 31, 1998 67,272 $ 3.21
Granted 88,500 4.01
------------------ -----------------
Balance at December 31, 1999 155,772 3.67
------------------ -----------------
Granted 50,000 4.00
Forfeited (10,227) 4.33
------------------ -----------------
Balance at December 31, 2000 195,545 $ 3.72
================== =================
No options were exercisable during the years ended December 31, 2000 and
1999. The weighted-average remaining contractual life of the options
outstanding at December 31, 2000 is approximately 7 years. The range of
exercisable prices was $2.50 - $5.25.
In accordance with SFAS No. 123, compensation cost determined based on the
fair value of the stock options at the grant dates would not have a
material impact on the Company's consolidated financial statements
disclosure or net loss for the years ended December 31, 2000 and 1999. The
assumptions used are as follows: an expected life of 5 years, a risk free
interest rate of 5.5% and no dividend yield.
(14) Related Party Transactions
DEKA has transactions in the ordinary course of business with a company in
which the owner of the company is also a stockholder of DEKA. Such
transactions are at prevailing market prices. Sales to this company totaled
approximately $320,000 and $398,000 for the years ended December 31, 2000
and 1999, respectively.
(15) Subsequent Events
In February and March 2001, the Company sold substantially all of its
assets, including accounts receivable, inventories, property and equipment
and certain intangible assets for approximately $11,300,000 in cash,
subject to post closing adjustments, to Microtek Medical, Inc. (Microtek),
a subsidiary of Isolyser Company, Inc. Microtek also assumed approximately
$2,200,000 of the Company's liabilities. The proceeds from the sale were
used to reduce notes payable. After the sale, the Company only had a
minimal amount of remaining assets.
In May 2001, a complaint was filed against the Company for a default on a
lease which occurred in 2001. The lessor is claiming that the entire amount
of the lease, which approximates $264,000, is due and payable.
19
DEKA MEDICAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
In July 2001, a commercial bank filed a complaint against the Company and
certain of the Company's shareholders who personally guaranteed the
Company's notes payable to the commercial bank. As discussed in note 8, the
Company was not in compliance with its debt covenants at December 31, 2000
and 1999 and, therefore, the associated debt is classified as current in
the accompanying consolidated financial statements. The commercial bank is
demanding the payment of approximately $2,530,000 in principal, along with
any related accrued interest.
20
Pro Forma Unaudited Condensed Consolidated Financial Statements
Effective March 2, 2001, Microtek acquired from Deka the Drape Assets. Effective
February 2, 2001, Microtek acquired from Deka the Clean-Op Assets. Subject to
post-closing adjustment, the purchase price in the Deka Acquisition was
approximately $11.9 million in cash. As adjusted through October 9, 2001, the
purchase price is approximately $11.6 million. Of this amount, $8.6 million was
allocated to the net assets acquired and $3.0 million was recorded as goodwill.
On February 16, 2001, Isolyser acquired substantially all of the assets of
MICROBasix LLC and an affiliated company (collectively, "MICROBasix") relating
to the disposal or reduction in volume of low level radioactive waste generated
by the nuclear industry (the "MICROBasix Acquisition"). The purchase price paid
at closing for the MICROBasix Acquisition was approximately $940,000, which
amount was paid as $675,000 in cash and the issuance of 250,000 shares of
Isolyser's common stock having an aggregate market value of approximately
$265,000 on the acquisition date.
The following unaudited pro forma condensed consolidated balance sheet of
Isolyser as of December 31, 2000 gives effect to the Deka Acquisition and the
MICROBasix Acquisition as if such acquisitions had occurred on December 31,
2000. The following unaudited pro forma condensed consolidated statement of
operations of Isolyser for the year ended December 31, 2000, gives effect to the
Deka Acquisition and the MICROBasix Acquisition as if such acquisitions had
occurred on January 1, 2000. The pro forma financial information should be read
in conjunction with the historical consolidated financial statements of Isolyser
and the related notes thereto appearing in Isolyser's Annual Report on Form 10-K
for the year ended December 31, 2000, previously filed with the Securities and
Exchange Commission. The pro forma financial information is not necessarily
indicative of the results that would have been reported had such acquisitions
occurred at the dates specified, nor is it necessarily indicative of future
results.
21
ISOLYSER COMPANY, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 2000
(in thousands)
Pro Forma
Historical Adjustments Pro Forma
------------- ------------------ ------------------
ASSETS
Current assets
Cash and cash equivalents $ 14,379 (3,799) (1,4) 10,580
Accounts receivable, net 12,269 4,109 (2) 16,378
Inventories, net 16,160 4,174 (2) 20,334
Prepaid expenses and other assets 1,633 - 1,633
------------- ------------------ ------------------
Total current assets 44,441 4,484 48,925
Property, plant and equipment 19,980 2,146 (2,3) 22,126
Less accumulated depreciation (12,948) - (12,948)
------------- ------------------ ------------------
Property, plant, and equipment, net 7,032 2,146 9,178
------------- ------------------ ------------------
Intangibles and other assets, net 25,496 5,130 (2,3,4,5) 30,626
------------- ------------------ ------------------
$ 76,969 11,760 88,729
============= ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,035 2,185 (2) 6,220
Accrued compensation 1,164 - 1,164
Other accrued liabilities 3,302 - 3,302
Current portion of deferred licensing revenue 1,508 - 1,508
Current portion of long-term debt 256 - 256
Current portion of product financing agreement 520 - 520
------------- ------------------ ------------------
Total current liabilities 10,785 2,185 12,970
Deferred licensing revenue 1,508 - 1,508
Long-term debt 491 8,641 (6) 9,132
Long-term portion of product financing agreement 406 - 406
Other long-term liabilities 181 669 (5) 850
------------- ------------------ ------------------
Total liabilities 13,371 11,495 24,866
Shareholders' equity
Common stock 42 - 42
Additional paid-in capital 208,613 265 (7) 208,878
Accumulated deficit (143,425) - (143,425)
Unearned shares restricted to employee
stock ownership plan (120) - (120)
Cumulative translation adjustment (180) - (180)
------------- ------------------ ------------------
64,930 265 65,195
Treasury shares, at cost (1,332) - (1,332)
------------- ------------------ ------------------
Total shareholders' equity 63,598 265 63,863
------------- ------------------ ------------------
$ 76,969 11,760 88,729
============= ================== ==================
See accompanying notes.
22
ISOLYSER COMPANY, INC.
Unaudited Condensed Consolidated Statement of Operations
Year Ended December 31, 2000
(in thousands, except per share data)
Pro Forma
Historical Adjustments Pro Forma
------------------ -------------------- -------------------
Net revenues $ 56,364 22,749 (8) 79,113
Cost of goods sold 35,928 21,682 (8,9) 57,620
------------------ -------------------- -------------------
Gross profit 20,426 1,067 21,493
Operating expenses:
Selling, general and administrative 21,246 3,264 (8,10,11) 24,510
Amortization of intangibles 1,780 392 (12) 2,172
Research and development 4,098 - 4,098
Restructuring charge 1,555 - 1,555
Other (21) - (21)
------------------ -------------------- -------------------
Total operating expenses 28,658 3,656 32,314
Loss from operations (8,232) (2,589) (10,821)
Interest income 823 - 823
Interest expense (474) (648) (13) (1,122)
Loss from minority equity position (4,104) - (4,104)
------------------ -------------------- -------------------
Loss before income tax provision (11,987) (3,237) (15,224)
Income tax provision 155 (162) (14) (7)
------------------ -------------------- -------------------
Net loss $ (12,142) (3,075) (15,217)
================== ==================== ===================
Net loss per common share:
Basic $ (0.29) (0.37)
Diluted $ (0.28) (0.35)
Weighted average number of common shares outstanding:
Basic 41,269 41,519
Diluted 43,221 43,471
See accompanying notes.
23
Notes To Pro Forma Condensed Consolidated Financial Statements
(All dollar amounts are in thousands)
1. To record the portion of the Deka Acquisition and the MICROBasix
Acquisition purchase prices which were funded with available cash (see
summary of the financing of each transaction below).
Deka Acquisition $ 3,000
MICROBasix Acquisition 675
-------------
$ 3,675
=============
2. With respect to the Deka Acquisition, to record the estimated fair value of
the assets acquired and the liabilities assumed and to reflect the excess
of acquisition cost over the estimated fair value of net assets acquired
(goodwill). The tentative purchase price, purchase price allocation and the
financing of the transaction are summarized as follows:
Purchase price paid as:
Cash $ 3,000
Proceeds of debt issue 8,641
---------
Total purchase consideration 11,641
Allocated to:
Accounts receivable, net $ 4,109
Inventories, net 4,174
Property and equipment 1,946
Identifiable intangible assets:
Non-compete agreements 400
Customer lists 200
Accounts payable (2,185)
---------
Total allocation 8,644
---------
Excess purchase price over allocation to
identifiable assets and liabilities (goodwill) $ 2,997
=========
3. With respect to the MICROBasix Acquisition, to record the estimated fair
value of the assets acquired. The tentative purchase price, purchase price
allocation and the financing of the transaction are summarized as follows:
Purchase price paid as:
Cash $ 675
Common stock 265
-------
Total purchase consideration 940
Allocated to:
Property and equipment $ 200
Identifiable intangible assets:
Non-compete agreements 100
Intellectual property 640
-------
Total allocation 940
-------
Excess purchase price over allocation to
identifiable assets and liabilities (goodwill) $ --
=======
24
4. To record the direct costs incurred in conjunction with the Deka
Acquisition, as follows:
Accounting and audit fees $ 62
Legal fees 61
Escrow fees 1
-------------
$ 124
=============
5. To record the present value of $669 with respect to the notes payable
agreements entered into with certain key employees of Deka. The notes
provide for a total payment of $980 to six individuals in March 2005,
subject to certain terms and conditions and the attainment of specified
sales and growth goals. The payments under the agreements are contingent on
the key employees' continued employment and are forfeited if employment is
terminated. Accordingly, these agreements are considered compensation for
services provided subsequent to the acquisition rather than as additional
purchase price consideration for the Deka acquisition.
6. To record the financing of a portion of the Deka Acquisition purchase price
under Isolyser's long-term credit agreement. This entry assumes that the
working capital adjustment of approximately $243 was used to repay amounts
initially drawn to fund the purchase.
7. To record the financing of a portion of the MICROBasix Acquisition purchase
price through the issuance of 250,000 shares of Isolyser's common stock
having an aggregate market value of approximately $265,000 on the
acquisition date.
8. To record the historical net revenues, cost of goods sold, and selling,
general and administrative expenses related to the Deka assets acquired for
the period from January 1, 2000 to December 31, 2000. The assets acquired
related to only a portion of Deka's historical operations and specifically
excluded assets related to the Deka's Gel Lite product line. The table
below is a reconciliation between the amounts shown in Deka's historical
financial statements for the year ended December 31, 2000 and the amounts
included in the pro forma adjustment. The deductions shown below represent
the revenues and related cost of goods sold attributable to the Gel Lite
products as well as the selling, general and administrative expenses
directly associated with these products:
Historical Pro Forma
Amounts Deductions Amounts
Net revenues $ 23,245 (496) $ 22,749
Cost of goods sold (22,668) 400 (22,268)
---------- ---------- ---------
Gross profit 577 (96) 481
Selling, general and
administrative expenses (3,976) 169 (3,807)
---------- ---------- ---------
$ (3,399) 73 $ (3,326)
========== ========== =========
9. To reduce Deka's historical cost of goods sold for cost reductions related
to facilities closures and employee terminations at Deka's Jacksonville
facility which was closed in conjunction with the Deka acquisition, as
follows:
Facilities costs, including rent and utilities $ 140
Employee-related costs, including salaries and
benefits of terminated employees 446
--------
$ 586
========
24
The above pro forma adjustment amounts represent cost savings resulting
from events which were directly attributable to the Deka acquisition, have
a continuing impact on Microtek and are factually supportable.
10. To reduce Deka's historical general and administrative expenses for cost
reductions related to Deka's corporate offices which were closed and Deka's
executive management and consultants who were terminated as a result of the
Deka acquisition, as follows:
Facilities costs, including rent and utilities $ 88
Employee-related costs, including salaries and benefits of
terminated employees and consultants 700
-------
$ 788
=======
The above pro forma adjustment amounts represent cost savings resulting
from events which were directly attributable to the Deka acquisition, have
a continuing impact on Microtek and are factually supportable.
11. To reflect annual compensation expense of $245 related to the employee note
arrangements discussed in note 5 above. The arrangements provide for a
total payment of $980 in March 2005. As payments under the agreements are
contingent on the key employees' continued employment and are forfeited if
employment is terminated, these agreements are considered compensation for
services provided subsequent to the acquisition rather than as additional
purchase price consideration for the Deka acquisition. Accordingly, the
total payment amount is being recognized as compensation expense ratably
over the 48-month term of the employee note arrangement.
12. To reflect the increase in amortization expense due to (a) the amortization
of goodwill on a straight-line basis over 15 years, and (b) the
amortization of intangibles and direct acquisition costs on a straight-line
basis over periods of 5 to 15 years as follows:
Amortization of goodwill $ 247
Amortization of intangibles and direct
acquisition costs 145
------------
$ 392
============
13. To reflect the increase in interest expense resulting from the issuance of
debt to finance a portion of the Deka Acquisition purchase price. The
interest rate on the new debt of $8,641 is assumed to be 7.5%. A change of
1/8 percent in the interest rate would result in a change in interest
expense and net loss of $11 and $10 before and after taxes, respectively.
14. To reflect the income tax effect of the pro forma adjustments which
together increased Isolyser's loss from operations by $3,237. An effective
tax rate of 5.0% was used with respect to state taxes. No amount for
Federal income taxes has been provided as Isolyser has net operating loss
carryforwards which are available to offset Isolyser's Federal tax
liability.
26
1400216v2