SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2003 Commission File No. 0-24866
MICROTEK MEDICAL HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Georgia 58-1746149
- ------------------------------------------ -----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
512 LEHMBERG ROAD
COLUMBUS, MISSISSIPPI 39702
(Address of principal executive offices)
(662) 327-1863
(Registrant's telephone number, including area code)
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 at least the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 14, 2003
Common Stock, $.001 par value 42,067,962
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31,
2002
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
for the Three Months ended March 31, 2003 and March 31, 2002
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2003 and March 31, 2002
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securityholders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROTEK MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
MARCH 31, 2003 DECEMBER 31, 2002
-----------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,344 $ 9,823
Accounts receivable, net 16,034 15,029
Other receivables 316 448
Inventories 25,918 24,794
Prepaid expenses and other assets 3,129 1,486
-----------------------------------------------
Total current assets 55,741 51,580
-----------------------------------------------
Property and equipment 23,831 23,312
Less accumulated depreciation (17,188) (16,659)
-----------------------------------------------
Property and equipment, net 6,643 6,653
-----------------------------------------------
Intangible assets, net 29,419 29,392
Deferred income taxes 4,544 5,638
Other assets 3,432 3,433
-----------------------------------------------
Total assets $ 99,779 $ 96,696
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,500 $ 5,118
Accrued expenses 2,675 3,281
Current portion of long-term debt 225 231
-----------------------------------------------
Total current liabilities 9,400 8,630
-----------------------------------------------
Long-term debt, net of current portion 7,286 7,136
Other long-term liabilities 2,039 2,044
-----------------------------------------------
Total liabilities 18,725 17,810
-----------------------------------------------
Shareholders' equity:
Common stock 43 43
Additional paid-in capital 211,766 211,505
Accumulated deficit (128,025) (130,222)
Cumulative translation adjustment (54) 18
Unrealized loss on available for sale securities (82) (105)
-----------------------------------------------
83,648 81,239
Treasury shares, at cost (2,594) (2,353)
-----------------------------------------------
Total shareholders' equity 81,054 78,886
-----------------------------------------------
Total liabilities and shareholders' equity $ 99,779 $ 96,696
===============================================
See notes to unaudited condensed consolidated financial statements.
3
MICROTEK MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------------------------------------------
Net sales $ 22,986 $ 20,824
Licensing revenues - 357
-------------------------------------------------
Net revenues 22,986 21,181
Cost of goods sold 14,122 12,585
-------------------------------------------------
Gross profit 8,864 8,596
Operating expenses:
Selling, general and administrative 7,172 6,744
Research and development 219 163
Amortization of intangibles 117 114
-------------------------------------------------
Total operating expenses 7,508 7,021
-------------------------------------------------
Income from operations 1,356 1,575
Interest income 27 37
Interest expense (65) (195)
Equity in earnings of investee 21 -
-------------------------------------------------
Income before income taxes 1,339 1,417
Income tax (benefit) expense (858) 89
-------------------------------------------------
Net income $ 2,197 $ 1,328
=================================================
Other comprehensive income (loss):
Foreign currency translation loss (72) (53)
Unrealized gain (loss) on available for sale
securities 23 (7)
-------------------------------------------------
Comprehensive income $ 2,148 $ 1,268
=================================================
Net income per common share - basic
and diluted $ 0.05 $ 0.03
=================================================
Basic weighted average number of common
shares outstanding 42,115 42,074
=================================================
Diluted weighted average number of common
shares outstanding 42,775 42,938
=================================================
See notes to unaudited condensed consolidated financial statements.
4
MICROTEK MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------------------------------------------
Cash flows from operating activities:
Net income $ 2,197 $ 1,328
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 571 623
Amortization of intangibles 117 114
Provision for doubtful accounts 288 65
Licensing revenues - (357)
Deferred income taxes (929) -
Provision for obsolete and slow moving inventory 77 43
Other (21) 18
Changes in operating assets and liabilities (2,034) (950)
-------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 266 884
-------------------------------------------------
Cash flows from investing activities -
purchase of and deposits for property and equipment (561) (260)
-------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under credit agreements 150 (2,793)
Changes in bank overdraft 724 223
Net repayments under notes payable (6) (413)
Proceeds from exercise of stock options 54 452
Repurchase of treasury stock (241) (46)
Proceeds from issuance of common stock 207 219
-------------------------------------------------
NET CASH PROVIDED BY (USED IN ) FINANCING ACTIVITIES 888 (2,358)
-------------------------------------------------
Effect of exchange rate changes on cash (72) (53)
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents 521 (1,787)
Cash and cash equivalents at beginning of period 9,823 10,587
-------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,344 $ 8,800
=================================================
See notes to unaudited condensed consolidated financial statements.
5
MICROTEK MEDICAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Microtek Medical Holdings, 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 healthcare market, which
represents one business segment. The Company markets its products to
hospitals and other end users through a broad distribution system
consisting of multiple channels including distributors, directly through
its own sales force, original equipment manufacturers, and private label
customers. The Company also markets certain of its products through custom
procedure tray companies. The Company's revenues are generated through two
operating units, Microtek Medical, Inc. ("Microtek"), a subsidiary of the
Company, and OREX Technologies International ("OTI"), an operating
division. Microtek is the core business of the Company. OTI is seeking to
commercialize its patented technology in the nuclear industry.
The unaudited condensed 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.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X for interim
financial statements required to be filed with the Securities and Exchange
Commission and do not include all information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, the
information furnished reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. Results for the interim periods are not necessarily indicative
of results to be expected for the full year. The consolidated financial
statements herein should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 (the "Annual
Report").
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also records a
corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation,
the obligation will be adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying
the obligation. The Company adopted SFAS 143 on January 1, 2003. The
adoption of SFAS 143 did not have an effect on the Company's consolidated
financial statements.
3. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion of results of operations and financial condition
relies on its consolidated financial statements that are prepared based on
6
certain critical accounting policies that require management to make
judgments and estimates that are subject to varying degrees of uncertainty.
The Company believes that investors need to be aware of these policies and
how they impact its financial statements as a whole, as well as its related
discussion and analysis presented herein. While the Company believes that
these accounting policies are based on sound measurement criteria, actual
future events can and often do result in outcomes that can be materially
different from these estimates or forecasts. The accounting policies and
related risks described in the Company's Annual Report are those that
depend most heavily on these judgments and estimates. For the three months
ended March 31, 2003, there were no material changes to any of the critical
accounting policies contained therein other than the adoption of the new
accounting standards as discussed herein.
4. 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. Cost includes material, labor and manufacturing overhead for
manufactured and assembled goods and materials only for goods purchased for
resale. Inventories are summarized by major classification at March 31,
2003 and December 31, 2002 as follows:
MARCH 31, 2003 DECEMBER 31, 2002
------------------ ------------------
Raw materials $ 10,731 $ 10,454
Work-in-progress 1,267 1,009
Finished goods 13,920 13,331
------------------ ------------------
Inventories $ 25,918 $ 24,794
================== ==================
At March 31, 2003 and December 31, 2002, the OTI inventories approximated
$2.5 million and $2.2 million, respectively. Included in OTI inventories at
March 31, 2003 and December 31, 2002 were finished goods of $943,000 and
$431,000, respectively, and raw materials of $1.6 million and $1.7 million,
respectively.
5. ACQUISITIONS
Effective November 29, 2002, Microtek acquired the surgical drape product
line of Gyrus ENT, LLC. This acquisition was accounted for under the
purchase method, and accordingly, the results of operations related to the
acquired assets have been included in the accompanying consolidated
financial statements from the date of acquisition. The preliminary
allocation of the total estimated purchase price of approximately $4.2
million in cash, as adjusted through March 31, 2003 and subject to
adjustment in 2003 until finalized, resulted in approximately $3.5 million
of goodwill as follows (in thousands):
Total estimated purchase consideration $ 4,185
Allocated to:
Inventories $ 625
Property and equipment 50
-------------
Total allocation 675
--------------
Goodwill $ 3,510
==============
7
6. INVESTMENT IN AVAILABLE FOR SALE SECURITIES
In February 2000, the Company paid $249,000 for approximately a 7.5%
interest in Consolidated Ecoprogress Technology, Inc., a Canadian
technology marketing company focused on developing and selling
biodegradable and disposable absorbent products such as diapers, feminine
hygiene, adult incontinence and other products. This investment is
classified in accordance with SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, as available for sale securities and is
stated at fair value. Unrealized gains and losses in the investment's fair
value are recorded as a separate component of shareholders' equity, and
unrealized losses that are other than temporary are recognized in net
income. During the quarter ended September 30, 2002, the Company recognized
an impairment loss of $55,000 related to an other-than-temporary decline in
the value of this investment. There were no such impairment losses
recognized during the three months ended March 31, 2003. The fair value of
this investment as of March 31, 2003 and December 31, 2002 was $111,000 and
$88,000, respectively.
7. LONG-TERM DEBT
The Credit Agreement. The Company maintains a credit agreement between the
Company and a Bank (the "Credit Agreement"). As amended to date, the Credit
Agreement provides for a $17.5 million revolving credit facility, which
matures on June 30, 2004. Borrowing availability under the revolving credit
facility is based on the lesser of (i) a percentage of eligible accounts
receivable and inventories or (ii) $17.5 million, less any outstanding
letters of credit issued under the Credit Agreement. Revolving credit
borrowings bear interest, at the Company's option, at either a floating
rate approximating the Bank's prime rate plus an interest margin (4.75% at
March 31, 2003) or LIBOR plus an interest margin (2.78% at March 31, 2003).
Borrowing availability under the revolving facility at March 31, 2003 and
December 31, 2002 was $14.3 million and $14.7 million, respectively. There
were outstanding borrowings under the revolving credit facility of $7.3
million at March 31, 2003 and $7.1 million at December 31, 2002. Borrowings
under the Credit Agreement are collateralized by the Company's accounts
receivable, inventories, equipment, the Company's stock of its subsidiaries
and certain of the Company's plants and offices.
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. In addition, the Company is not permitted to pay
any dividends. At March 31, 2003 and December 31, 2002, the Company was in
compliance with all of its financial covenants under the Credit Agreement.
The Credit Agreement provides for the issuance of up to $1.0 million in
letters of credit. There were no outstanding letters of credit at March 31,
2003 or December 31, 2002. The Credit Agreement also provides for a fee of
0.375% per annum on the unused commitment, an annual collateral monitoring
fee of $35,000 and an outstanding letter of credit fee of 2.0% per annum.
Other Long-Term Debt. The Company is obligated under certain long-term
leases and notes payable, which aggregated $225,000 and $231,000 at March
31, 2003 and December 31, 2002, respectively. These obligations bear
interest at rates ranging from 4.75% to 11.9% and mature on various dates
through October 2003. The acquisition notes payable aggregating $225,000 at
March 31, 2003 and December 31, 2002, respectively, are subordinated to the
Credit Agreement.
The carrying value of long-term debt at March 31, 2003 and December 31,
2002 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.
8
8. EARNINGS PER SHARE
Earnings per share is calculated in accordance SFAS 128, Earnings Per
Share, which requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex
capital structures. Basic per share income is computed using the weighted
average number of common shares outstanding for the period. Diluted per
share income is computed including the dilutive effect of all contingently
issuable shares. Dilutive potential common shares are calculated in
accordance with the treasury stock method, which assumes that proceeds from
the exercise of all options are used to repurchase common shares at market
value. The number of shares remaining after the proceeds from exercise are
exhausted represents the potentially dilutive effect of the options. The
following table reflects the weighted average number of shares used to
calculate basic and diluted earnings per share for the periods presented
(in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
--------------- ---------------
Basic Shares 42,115 42,074
Dilutive Shares (due to stock options) 660 864
--------------- ---------------
Diluted Shares 42,775 42,938
=============== ===============
Options to purchase approximately 758,000 and 966,000 shares were
outstanding at March 31, 2003 and 2002, respectively, but were not included
in the computation of diluted net income per share because the exercise
price of the options was greater than the average market price of the
common shares, and therefore, the effect would be antidilutive.
9. STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, no stock-based employee compensation cost is reflected in net
income, as all options granted under the Company's stock option plans had
an exercise price equal to the market value of the underlying common stock
on the date of the grant.
Pro forma information regarding interim net income and earnings per share
is required by SFAS 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123, and has
been determined as if the Company had accounted for its employee stock
options under the fair value method. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
THREE MONTHS ENDED MARCH 31,
2003 2002
---- ----
Dividend yield 0.0% 0.0%
Expected volatility 9.0% 51.0%
Risk free interest rate 3.9% 4.5%
Forfeiture rate 0.0% 0.0%
Expected life, in years 10.0 10.0
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
9
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The following table illustrates the effect on net income and net income per
share as if the Company had applied the fair value recognition provisions
of SFAS 123, Accounting for Stock-Based Compensation, to its stock-based
employee compensation plans (in thousands, except per share data).
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2003 2002
---------------- ----------------
Net income, as reported $ 2,197 $ 1,328
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (331) (199)
---------------- ----------------
Pro forma net income $ 1,866 $ 1,129
================ ================
Net income per share:
Basic and Diluted - as reported $ 0.05 $ 0.03
================ ================
Basic and Diluted - pro forma $ 0.04 $ 0.03
================ ================
10. STOCK REPURCHASE PROGRAM
In 2002, the Board of Directors amended the Company's existing stock
repurchase program to authorize the repurchase of an aggregate of 2.0
million shares through December 31, 2003. A total of 100,000 shares were
repurchased under this program during the three months ended March 31,
2003. As of March 31, 2003, the Company had repurchased 1,168,795 shares
under this program for an aggregate repurchase price of approximately $2.2
million.
11. COMMITMENTS AND CONTINGENCIES
On February 11, 2003 (the "Petition Date"), Maxxim Medical, Inc. and
certain of its U.S. affiliates (collectively, "Maxxim Medical") filed a
petition under Chapter 11 of the U.S. Bankruptcy Code to reorganize and
implement a balance sheet restructuring. Maxxim Medical, one of the
Company's top customers in 2002, accounted for $5.7 million or 6.6% of the
Company's total net revenues in 2002. As of the Petition Date, amounts owed
to the Company by Maxxim Medical totaled approximately $850,000. Prior to
March 31, 2003, the Company collected $300,000, reducing the amount
outstanding from Maxxim Medical to $550,000. During the three-month period
ended March 31, 2003, the Company increased its allowance for doubtful
accounts by $190,000, or $.0045 per diluted share, reducing the net amount
of accounts receivable from Maxxim Medical to management's best estimate of
the amount which will be collected based on the information currently
available.
Maxxim Medical expects to continue its day-to-day operations under the
jurisdiction of the bankruptcy court. Because of the filing, Maxxim Medical
must obtain court authorization before it can pay the debts it incurred
10
before the Petition Date, including amounts currently owed to the Company.
The Company and Maxxim Medical have established guidelines governing future
sales of products to Maxxim Medical, including available credit and payment
terms.
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
consolidated financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net revenues for the three months ended March 31, 2003 (the "2003 Quarter") were
$23.0 million, an increase of $1.8 million or 8.5 percent from the $21.2 million
of net revenues reported for the three months ended March 31, 2002 (the "2002
Quarter"). Excluding licensing revenues in the 2002 Quarter, net revenues in the
2002 Quarter were $20.8 million. There were no license revenues recorded in the
2003 Quarter. The increase in net revenues in the 2003 Quarter as compared to
the 2002 Quarter is primarily attributable to increased revenues from Microtek's
domestic core businesses, its CleanOp product line, and its international
channel and from OTI's nuclear business revenues. These increases were partially
offset by revenue declines in Microtek's safety product line and its OEM channel
and the termination of the OTI licensing revenues in December 2002.
For the 2003 Quarter, Microtek's net revenues totaled $21.6 million as compared
to $20.5 million for the 2002 Quarter. The following table depicts Microtek's
domestic and international revenues and the relative percentage of each to
Microtek's total revenues for the 2003 Quarter and 2002 Quarter:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------------- -------------- -------------- --------------
Domestic $ 18.1 83.9% $ 17.7 86.4%
International 3.5 16.1% 2.8 13.6%
------------- -------------- -------------- --------------
Total $ 21.6 100.0% $ 20.5 100.0%
============= ============== ============== ==============
Microtek's domestic revenues are generated through two primary channels or
customer categories: hospital branded and contract manufacturing (commonly
referred to as OEM). Included in Microtek's OEM revenues are sales of products
to custom procedure tray companies and other "non-branded" or private label
customers. Microtek's domestic revenues in the 2003 Quarter increased by
$361,000 from the 2002 Quarter due to an increase of approximately $934,000 in
Microtek's hospital branded revenues and an offsetting decrease of $573,000, or
approximately seven percent, in Microtek's OEM revenues. Hospital branded
revenue growth in the 2003 Quarter over the 2002 Quarter was demonstrated in
Microtek's domestic core businesses (an increase of $538,000 or 9.4 percent) and
in its CleanOp product line (an increase of $680,000 or 63.9 percent). These
increases were offset by a $381,000, or 24.8 percent, decrease in Microtek's
safety revenues in the 2003 Quarter as compared to the 2002 Quarter. The
decrease in Microtek's OEM revenues in the 2003 Quarter as compared to the 2002
Quarter is attributable to the timing of OEM revenue order placement by a number
of customers and pricing pressures. Microtek's international net revenues were
$3.5 million for the 2003 Quarter, an increase of $673,000 or 24.1 percent over
the 2002 Quarter.
OTI's net revenues were $1.4 million in the 2003 Quarter versus $599,000 in the
2002 Quarter. Licensing revenues in the 2002 Quarter were $357,000. The Company
ceased recognizing the non-cash licensing revenues in December 2002. Included in
OTI's net revenues for the 2003 Quarter and 2002 Quarter were revenues related
to its nuclear operations of approximately $1.2 million and $89,000,
respectively. The growth of OTI's nuclear revenues is attributable to growing
nuclear industry usage and acceptance of the OREX products. OREX products are
presently in use at approximately 20 nuclear power stations. There are 13
nuclear power stations using OREX products during their spring outages, nine of
which are using OREX products as their primary protective clothing of choice,
11
and other facilities are conducting initial product trials. There were
approximately 300,000 OREX protective clothing dressouts in the field at various
facilities during the first quarter of 2003. The balance of OTI's net revenues
in the 2003 Quarter and 2002 Quarter amounted to approximately $200,000 and
$153,000, respectively, and is attributable to the liquidation of certain of the
OREX inventories.
Gross margins in the 2003 Quarter and 2002 Quarter were 38.6 percent and 40.6
percent, respectively, a decrease in the 2003 Quarter of approximately 2.0
percent. Approximately one percentage point of this gross margin decline is
attributable to the absence of the amortization of deferred license revenues in
the 2003 Quarter. Because there was no cost of sales associated with the
deferred license revenues recorded in the 2002 Quarter, these revenues
contributed directly to the Company's gross margin. The balance of the gross
margin decline in the 2003 Quarter stems from the Company's changing mix of
products and the slightly dilutive nature of Microtek's CleanOp product line,
Microtek's international business and OTI's nuclear revenues.
Operating expenses as a percentage of net revenues in the 2003 Quarter were 32.7
percent versus 33.1 percent in the 2002 Quarter. Selling, general and
administrative expenses were $7.2 million or 31.2 percent of net revenues in the
2003 Quarter, versus $6.7 million or 31.8 percent of net revenues in the 2002
Quarter. The increase noted in the absolute dollar amount of selling, general
and administrative expenses is attributable to increases in the Company's
variable selling costs and an increase in marketing expenses resulting from the
Company's expanded marketing campaign for its branded products. Additionally,
during the 2002 Quarter, the Company increased its allowance for doubtful
accounts by approximately $190,000 as the result of the Maxxim Medical
bankruptcy described in the notes to the unaudited condensed consolidated
financial statements. This additional provision for amounts potentially
uncollectible from Maxxim Medical represents approximately $0.0045 per basic and
diluted share and increased selling, general and administrative expenses as a
percentage of net revenues in the 2003 Quarter by approximately 1.0 percent.
Research and development expenses increased by $56,000 in the 2003 Quarter as
compared to the 2002 Quarter. This increase is the net effect of a $131,000
increase in costs related to Microtek's new product development program which
includes a number of product enhancements and new product introductions planned
for 2003 and a $75,000 decrease in costs associated with OTI's research and
development activities, substantially all of which are concentrated on the
nuclear industry.
Amortization of intangibles in the 2003 Quarter was $117,000 and was consistent
with amortization expense recorded in the 2002 Quarter.
Income from operations for the Company in the 2003 Quarter was $1.4 million
versus $1.6 million in the 2002 Quarter. For the 2003 Quarter, Microtek's
operating profit of $1.4 million declined by $338,000 from the $1.8 million
recorded in the 2002 Quarter. The Company's OTI division reported an operating
loss of $58,000 in the 2003 Quarter versus an operating loss of $147,000 for the
2002 Quarter, an improvement of approximately 60.9 percent.
Interest expense, net of interest income, was $38,000 in the 2003 Quarter as
compared to $158,000 in the 2002 Quarter. The $120,000 decrease in net interest
expense in the 2003 Quarter as compared to the 2002 Quarter is attributable to
declining interest rates and to lower average borrowings under the Company's
lines of credit facility during the 2003 Quarter and was slightly offset by
lower interest income on cash and cash equivalents due to lower average interest
rates.
The Company's provision for income taxes in the 2003 Quarter reflects a net
income tax benefit of approximately $858,000 which is comprised of a $929,000
income tax benefit related to the decrease in the Company's valuation allowance
with respect to certain of its deferred tax assets, principally its net
operating loss carryforwards, and the offsetting state and foreign income tax
provision for the 2003 Quarter of approximately $71,000. The income tax benefit
12
portion of the provision for income taxes in the 2003 Quarter amounted to
approximately $0.02 per basic and diluted share. The Company's provision for
income taxes in the 2002 Quarter consisted entirely of state and foreign income
taxes of approximately $89,000.
The resulting net income for the 2003 Quarter was $2.2 million, or $0.05 per
basic and diluted share, as compared to net income for the 2002 Quarter of $1.3
million, or $0.03 per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company's cash and cash equivalents totaled $10.3
million as compared to $9.8 million at December 31, 2002.
During the 2003 Quarter, the Company's operating activities provided cash of
$266,000 as compared to $884,000 in the 2002 Quarter. The decrease in cash
provided by operating activities in the 2003 Quarter is attributable to
increases in the Company's accounts receivable and inventory balances which are
attributable to its increase in net revenues. Cash used in investing activities
consisted of the purchase of property and equipment and amounted to $561,000 in
the 2003 Quarter as compared to $260,000 in the 2002 Quarter. During the 2003
Quarter, cash provided by financing activities was $888,000. Net borrowings
under the Company's Credit Agreement in the 2003 Quarter were $150,000, and
repayments of other long-term debt agreements in the 2003 Quarter totaled
$6,000. During the 2003 Quarter, the Company received $54,000 in proceeds from
the exercise of stock options, generated $207,000 from the issuance of stock and
purchased 100,000 shares of stock for $241,000. During the 2002 Quarter,
repayments under the Company's Credit Agreement were $2.8 million, and
repayments of other long-term debt agreements were $413,000, including a lump
sum payment to Thantex of $341,000 under the product financing agreement
described in the Company's Annual Report. This payment satisfied in full the
Company's remaining obligation under this agreement. During the 2002 Quarter,
the Company received $452,000 in proceeds from the exercise of stock options,
generated $219,000 from the issuance of stock and purchased 40,000 shares of
stock for $46,000.
The Company maintains a $17.5 million credit agreement (as amended to date, the
"Credit Agreement") with the JP Morgan Chase Bank (the "Bank"), consisting of a
revolving credit facility maturing on June 30, 2004. Borrowing availability
under the revolving credit facility is based on the lesser of (i) a percentage
of eligible accounts receivable and inventories or (ii) $17.5 million, less any
outstanding letters of credit issued under the Credit Agreement. Outstanding
borrowings under the revolving credit facility were $7.3 million and $7.1
million at March 31, 2003 and December 31, 2002, respectively. As of March 31,
2003, the Company had additional borrowing availability under the revolving
facility of $7.0 million. As of May 14, 2003, the Company's total borrowing
availability under the revolving facility was $13.9 million, of which the
Company had borrowed $6.7 million. Revolving credit borrowings bear interest, at
the Company's option, at either a floating rate approximating the Bank's prime
rate plus an interest margin (4.75% at May 14, 2003) or LIBOR plus an interest
margin (2.78% at May 14, 2003). At March 31, 2003, the Company was in compliance
with its financial covenants under the Credit Agreement.
Based on its current business plan, the Company expects that cash equivalents
and short term investments on hand, the Company's credit facility, as amended,
and funds budgeted to be generated from operations will be adequate to meet its
liquidity and capital requirements for the next year. The Company's liquidity is
not dependent upon the use of off-balance sheet financing arrangements.
Currently unforeseen future developments and increased working capital
requirements may require additional debt financing or issuance of common stock
in 2003 and subsequent years.
13
FORWARD LOOKING STATEMENTS
Statements made in this Quarterly Report include forward-looking statements made
under the provisions of the Private Securities Litigation Reform Act of 1995
including, but not limited to, the ability of the Company to meet its liquidity
and capital requirements. The Company's actual results could differ materially
from such forward-looking statements and such results will be affected by risks
described in the Company's Annual Report including, without limitation, those
described under "Risk Factors -History of Net Losses", "-Reliance upon
Microtek", "-Competition", "-Product Liability", "-Stock Price Volatility",
"-Dependence on Key Personnel", "-Anti-takeover Provisions", "-Low Barriers to
Entry for Competitive Products", "-Potential Erosion of Profit Margins", "-Risks
of Completing Acquisitions", "-Small Sales and Marketing Force", "-Reliance upon
Distributors", "-Microtek Regulatory Risks", "-Risks of Obsolescence", "-Reduced
OREX Market Potential", "-OREX Commercialization Risks", "-OREX Manufacturing
and Supply Risks", "-Risks Affecting Protection of Technologies", "-Risks of
Technological Obsolescence" and "-OTI Regulatory Risks". We do not undertake to
update our forward-looking statements to reflect future events or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's greatest sensitivity with respect to market risk is to changes in
the general level of U.S. interest rates and its effect upon the Company's
interest expense. At March 31, 2003, the Company had $7.5 million of long-term
or short-term debt bearing interest at floating rates. Because these rates are
variable, a 1% increase in interest rates would have resulted in additional
interest expense of approximately $18,000 for the three months ended March 31,
2003 and a 1% reduction in interest rates would have resulted in reduced
interest expense of approximately $18,000 for the three months ended March 31,
2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Under the supervision and
with the participation of the Company's management, including the Company's
President and Chief Executive Officer and Chief Financial Officer, the
Company carried out an evaluation of the effectiveness of the Company's
"disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the "Evaluation
Date") within 90 days prior to the date of this report. Based upon that
evaluation, the Company's President and Chief Executive Officer and its
Chief Financial Officer have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures were adequate and designed to
ensure that the information relating to the Company (including its
consolidated subsidiaries) required to be disclosed in the reports filed or
submitted by the Company under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the requisite time
periods.
(b) Changes in internal controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly
affect internal controls subsequent to Evaluation Date.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter for which this report is filed, there were no material
modifications in the instruments defining the rights of shareholders. During the
quarter for which this report is filed, none of the rights evidenced by the
shares of the Company's common stock were materially limited or qualified by the
issuance or modification of any other class of securities.
14
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
No. Description
- ------- ------------
3.1(1) Articles of Incorporation of Isolyser Company, Inc.
3.2(2) Articles of Amendment to Articles of Incorporation of Isolyser
Company, Inc.
3.3(3) Amended and Restated Bylaws of Isolyser Company, Inc.
4.1(1) Specimen Certificate of Common Stock
4.2 Fourth Amendment Agreement dated as of March 31, 2003, to the Amended
and Restated Credit Agreement, dated as of May 14, 2001, among
Microtek Medical Holdings, Inc., Microtek Medical, Inc., Isolyser-MSI,
Inc. and JP Morgan Chase Bank
- ------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-83474).
(2) Incorporated by reference to Exhibit 3.2 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
(3) Incorporated by reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K filed April 23, 2002.
(b) The registrant filed no Current Reports on Form 8-K during the quarter
ended March 31, 2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this quarterly report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized on May 14, 2003.
MICROTEK MEDICAL HOLDINGS, INC.
By: /s/ Dan R. Lee
--------------------------------------
Dan R. Lee
Chairman, President & Chief Executive
Officer
(principal executive officer)
By: /s/ Roger G. Wilson
--------------------------------------
Roger G. Wilson
Chief Financial Officer
(principal financial officer)
16
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dan R. Lee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Microtek Medical
Holdings, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ Dan R. Lee
---------------------------------------
Dan R. Lee
Chairman, President and Chief Executive
Officer
17
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Roger G. Wilson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Microtek Medical
Holdings, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ Roger G. Wilson
---------------------------------------
Roger G. Wilson
Chief Financial Officer, Treasurer and
Assistant Secretary
18
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