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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 September 30, 2002 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 November 8, 2002
- ----- -------------------------------
Common Stock, $.001 par value 43,145,795
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MICROTEK MEDICAL HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
Assets September 30, 2002 December 31, 2001
------ -----------------------------------------
Current assets
Cash and cash equivalents $ 10,112 $ 10,587
Accounts receivable, net 16,758 16,141
Other receivables 408 587
Inventory, net 25,290 27,022
Prepaid expenses and other assets 1,002 1,215
-----------------------------------------
Total current assets 53,570 55,552
-----------------------------------------
Property and equipment 23,126 21,994
Less accumulated depreciation (16,167) (14,455)
-----------------------------------------
Property and equipment, net 6,959 7,539
-----------------------------------------
Intangible assets, net 26,060 26,351
Deferred income taxes 2,018 2,018
Other assets, net 3,225 2,870
-----------------------------------------
Total assets $ 91,832 $ 94,330
=========================================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
Accounts payable $ 5,045 $ 4,934
Accrued expenses 3,312 3,091
Accrued customer rebates - 490
Current portion of long-term debt 241 260
Deferred licensing revenue 357 1,427
Product financing agreement - 404
-----------------------------------------
Total current liabilities 8,955 10,606
-----------------------------------------
Long-term debt 7,151 12,649
Other long-term liabilities 1,977 1,487
-----------------------------------------
Total liabilities 18,083 24,742
-----------------------------------------
Shareholders' equity
Common stock 43 43
Additional paid-in capital 211,318 210,251
Accumulated deficit (135,036) (138,636)
Cumulative translation adjustment (81) (239)
Unrealized loss on available for sale securities (113) (96)
Unearned shares restricted to employee stock ownership plan (60) (60)
-----------------------------------------
76,071 71,263
Treasury shares, at cost (2,322) (1,675)
-----------------------------------------
Total shareholders' equity 73,749 69,588
-----------------------------------------
Total liabilities and shareholders' equity $ 91,832 $ 94,330
=========================================
See notes to condensed consolidated financial statements.
2
MICROTEK MEDICAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
(unaudited)
Three months ended Three months ended Nine months ended Nine months ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------- ------------------- --------------------- ----------------------
Net sales $ 21,808 $ 21,492 $ 63,448 $ 58,708
Licensing revenues 357 377 1,070 1,133
------------------- ------------------- --------------------- ----------------------
Net revenues 22,165 21,869 64,518 59,841
Cost of goods sold 13,597 12,816 38,889 35,655
------------------- ------------------- --------------------- ----------------------
Gross profit 8,568 9,053 25,629 24,186
Operating expenses:
Selling, general and administrative 6,579 6,525 20,496 18,463
Research and development 155 382 572 1,280
Amortization of intangibles 114 395 342 1,093
------------------- ------------------- --------------------- ----------------------
Total operating expenses 6,848 7,302 21,410 20,836
------------------- ------------------- --------------------- ----------------------
Income from operations 1,720 1,751 4,219 3,350
Interest income 35 67 110 256
Interest expense (148) (251) (518) (594)
Equity in earnings of investee 10 - 27 -
Other income - - 47 -
------------------- ------------------- --------------------- ----------------------
Income before income taxes 1,617 1,567 3,885 3,012
Income tax provision 135 144 285 317
------------------- ------------------- --------------------- ----------------------
Net income 1,482 $ 1,423 $ 3,600 $ 2,695
=================== =================== ===================== ======================
Other comprehensive income (loss):
Foreign currency translation
(loss) gain (49) (104) 109 (235)
Unrealized gain (loss) on
available for sale securities 6 (97) (23) (116)
------------------- ------------------- --------------------- ----------------------
Comprehensive income $ 1,439 $ 1,222 $ 2,204 $ 2,344
=================== =================== ===================== ======================
Net income per common share:
Basic $ 0.04 $ 0.03 $ 0.09 $ 0.06
=================== =================== ===================== ======================
Diluted $ 0.03 $ 0.03 $ 0.08 $ 0.06
=================== =================== ===================== ======================
Weighted average number of common
shares outstanding -
Basic 42,205 41,724 42,175 41,605
=================== =================== ===================== ======================
Diluted 42,546 42,843 42,964 42,234
=================== =================== ===================== ======================
See notes to condensed consolidated financial statements.
3
MICROTEK MEDICAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended Nine months ended
September 30, 2002 September 30, 2001
----------------------------------------------
Cash flows from operating activities:
Net income $ 3,600 $ 2,695
Adjustments to reconcile net income to net cash provided
by (used in) operating Activities:
Depreciation 1,802 1,848
Amortization of intangibles 342 1,093
Provision for doubtful accounts 155 10
Licensing revenues (1,070) (1,133)
Provision for obsolete and slow moving inventory 89 177
Stock option compensation expense 126 -
Loss on disposal of property and equipment 57 -
Equity in earnings of investee (27) -
Other (16) -
Changes in assets and liabilities, net of effects of
acquisition 1,104 (8,814)
----------------------------------------------
Net cash provided by (used in) operating activities 6,162 (4,124)
----------------------------------------------
Cash flows from investing activities:
Purchase of and deposits for property and equipment (1,308) (758)
Acquisitions - (12,315)
----------------------------------------------
Net cash used in investing activities (1,308) (13,073)
----------------------------------------------
Cash flows from financing activities:
Net (repayments) borrowings under credit agreements (5,492) 12,541
Changes in bank overdraft 140 (169)
Net repayments under notes payable (429) (416)
Proceeds from exercise of stock options 487 130
Repurchase of treasury stock (647) (254)
Proceeds from issuance of common stock 454 366
----------------------------------------------
Net cash (used in) provided by financing activities (5,487) 12,198
----------------------------------------------
Effect of exchange rate changes on cash 158 (27)
----------------------------------------------
Net decrease in cash and cash equivalents (475) (5,026)
Cash and cash equivalents at beginning of period 10,587 14,379
----------------------------------------------
Cash and cash equivalents at end of period $ 10,112 $ 9,353
==============================================
See notes to condensed consolidated financial statements.
4
MICROTEK MEDICAL HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1) 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, 2001 (the "Annual
Report").
2) On May 22, 2002, the Board of Directors of the Company adopted a
resolution to change the Company's name from Isolyser Company, Inc. to Microtek
Medical Holdings, Inc. Shareholder approval of the name change was not required.
This name change was effective as of July 1, 2002. The name change did not
change the Company's existing structure or ownership.
3) Inventories are stated at the lower of cost or market and are summarized
as follows:
(in thousands) September 30, 2002 December 31, 2001
------------------ -----------------
Raw materials and supplies $ 12,458 $ 13,504
Work in process 754
890
Finished goods 13,996 14,634
----------------- --------------------
27,208 29,028
Reserves for slow moving and
obsolete inventories (1,918) (2,006)
----------------- --------------------
Inventory, net $ 25,290 $ 27,022
================= ====================
At September 30, 2002 and December 31, 2001, the net OREX inventory was
approximately $2.4 million and $2.6 million, respectively. Included in the OREX
inventories at September 30, 2002 were finished goods of $317,000 and raw
materials of $2.1 million.
4) Effective February 2, 2001, Microtek Medical, Inc. ("Microtek"), a
subsidiary of the Company, entered into a definitive agreement to acquire
substantially all of the assets of Deka Medical, Inc. ("Deka") for cash.
Concurrently with the signing of the definitive agreement, Microtek acquired
Deka's post-surgical clean-up product line. Effective March 2, 2001, Microtek
concluded the acquisition by acquiring substantially all of the assets of Deka
used in Deka's patient and medical equipment drape product line. The allocation
of the total purchase price of approximately $11.6 million resulted in an excess
of purchase price over the fair value of the net assets acquired (goodwill) of
approximately $3.3 million.
The above described 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 condensed consolidated financial
statements from the date of acquisition. The following unaudited pro forma
financial information reflects the Company's results of operations as if the
Deka acquisition had been completed on January 1, 2001:
Nine months ended (in
September 30, 2001
---------------------
(thousands, except per share data)
Net revenues $ 63,591
Net income 2,704
Net income per common share -
basic and diluted $ 0.06
5
The pro forma financial information is based on estimates and assumptions
which management believes are reasonable. However, the pro forma results are not
necessarily indicative of the operating results that would have occurred had the
Deka acquisition been consummated as of the date indicated, nor are they
necessarily indicative of future operating results.
5) The Company maintains a $17.5 million credit agreement (as amended to
date, the "Credit Agreement") with the Chase Manhattan 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 inventory 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 (5.25%
at September 30, 2002) or LIBOR plus an interest margin (4.16% at September 30,
2002). There were outstanding borrowings under the revolving credit facility of
$6.9 million at September 30, 2002 and $12.4 million at December 31, 2001.
Borrowings under the Credit Agreement are collateralized by the Company's
accounts receivable, inventory, 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 and earnings, and limitations on acquisitions,
dispositions, capital expenditures and additional indebtedness. In addition, the
Company is not permitted to pay any dividends.
6) 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. The
difference between basic and diluted weighted average shares is attributable to
341,000 and 789,000 dilutive stock options outstanding for the three months and
nine months ended September 30, 2002, respectively. There were 1.1 million and
629,000 dilutive stock options outstanding for the three months and nine months
ended September 30, 2001, respectively.
7) On February 11, 2000, the Company paid $249,000 for approximately 7.5%
interest in Consolidated Ecoprogress Technology, Inc. ("CES"). CES is a Canadian
environmental technology company focused on being a leader in developing and
selling biodegradable and disposable absorbent products such as diapers,
feminine hygiene, adult incontinence and other products. This investment is
classified as available for sale in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and is carried at fair market value. Unrealized
gains and losses in the investment's fair market value are recorded as a
separate component of shareholders' equity, and unrealized losses that are other
than temporary are recognized in net income. The value of this investment as of
September 30, 2002 was $81,000. Losses recognized in the statement of operations
during the three months ended September 30, 2002 amounted to $55,000.
8) At December 31, 2001, the Company had restructuring reserves of
$101,000. Additions and charges against the reserves totaled $265,000 and
$291,000, respectively, during the nine months ended September 30, 2002, leaving
a balance of $75,000 in the reserves at September 30, 2002. The activity is
shown below:
(in thousands) December 31, 2001 September 30, 2002
Description Balance Additions Deductions Balance
- ----------- ------------ ----------- ------------ ------------
Severance and consulting $ 26 $ 265 $ (291) $ -
arrangements
Impaired equipment reserve 75 - - 75
------------ ----------- ------------ ------------
Total $ 101 $ 265 $ (291) $ 75
============ =========== ============ ============
During the nine months ended September 30, 2002, severance and vacation
benefits totaling $265,000 were accrued and paid with respect to the termination
of 29 employees of Microtek's Columbus, Mississippi facility, 19 employees of
6
Microtek's Waynesville, North Carolina facility, two employees of Microtek's
Tyler, Texas facility and five employees of the Company's OTI division.
9) In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, Goodwill and Other Intangible Assets, which requires that the
amortization of goodwill cease prospectively upon adoption and instead, the
carrying value of goodwill be evaluated using an impairment approach.
Identifiable intangible assets will continue to be amortized over their useful
lives and reviewed for impairment in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001, and was implemented by the
Company on January 1, 2002. The Company has chosen June 30th as its annual
impairment test date. The Company's transitional impairment test was performed
as of June 30, 2002, and no impairment loss was indicated.
The Company's goodwill and intangible assets as of September 30, 2002 and
December 31, 2001 are summarized as follows:
(in thousands) September 30, 2002 December 31, 2001
------------------ -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------- ------------ ------------- ------------
Goodwill $ 29,197 $ 6,732 $ 29,953 $ 7,488
Customer lists 586 81 586 62
Covenants not to compete 575 230 575 124
Patent and license agreements 3,897 1,856 3,847 1,701
Other 887 183 887 122
------------- ------------ ------------- ------------
Total $ 35,142 $ 9,082 $ 35,848 $ 9,497
============= ============ ============= ============
The following financial information is presented as if SFAS No. 142 was
adopted at the beginning of the quarter ended September 30, 2001:
Three months ended Nine months ended
(in thousands, except per share data) September 30, 2001 September 30, 2001
------------------ ------------------
Net income as reported $ 1,423 $ 2,695
Goodwill amortization 278 781
--------- ---------
Adjusted net income $ 1,701 $ 3,476
========= =========
Net income per common share - basic and diluted:
As reported $ 0.03 $ 0.06
Goodwill amortization 0.01 0.02
--------- ---------
As adjusted $ 0.04 $ 0.08
========= =========
Amortization expense related to intangible assets was $114,000 and $117,000
for the three months ended September 30, 2002 and 2001, and was $342,000 and
$312,000 for the nine months ended September 30, 2002 and 2001, respectively.
Following is the estimated annual amortization expense subsequent to December
31, 2001:
7
Amortization
Year Expense
---- -------
2002 - 2004 $454,000
2005 431,000
2006 287,500
2007-2011 281,000
2012 161,500
2013 75,000
2014-2015 70,000
2016 24,000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net revenues for the three months ended September 30, 2002 (the "2002 Quarter")
were $22.2 million, an increase of $296,000 or 1.4 percent from the $21.9
million of net revenues reported for the three months ended September 30, 2001
(the "2001 Quarter"). Net revenues for the nine months ended September 30, 2002
(the "2002 Period") were $64.5 million, an increase of $4.7 million or 7.8
percent over the $59.8 million of net revenues reported for the nine months
ended September 30, 2001 (the "2001 Period"). Excluding licensing revenues
associated with the amortization of the $10.5 million payment by Allegiance
allocated to the Company's Supply and License Agreement with Allegiance, net
revenues in the 2002 Quarter and 2002 Period were $21.8 million and $63.4
million, respectively, as compared to $21.5 million in the 2001 Quarter and
$58.7 million in the 2001 Period. The increase in net revenues in the 2002
Quarter as compared to the 2001 Quarter is primarily attributable to increased
revenues from the Company's CleanOp product line and international business.
These increases were substantially offset by the substantial amount of
non-recurring order backlog in 2001 assumed in conjunction with the Deka
acquisition which occurred in the first quarter of 2001. The increase in net
revenues in the 2002 Period as compared to the 2001 Period is primarily
attributable to the drape and CleanOp product lines acquired from Deka,
substantial international net revenue growth, and growth of CleanOp product line
revenues since being acquired from Deka.
For the 2002 Quarter, Microtek's net revenues totaled $21.2 million,
substantially equal to those reported for the 2001 Quarter. Microtek's net
revenues for the 2002 Period were $62.5 million, approximately $4.5 million more
than the $58.0 million reported in the 2001 Period. The following tables depict
Microtek's domestic and international revenues and the relative percentage of
each to Microtek's total revenues for the 2002 Quarter and 2001 Quarter and for
the 2002 Period and the 2001 Period:
Three months ended Three months ended
September 30, 2002 September 30, 2001
------------------ ------------------
Amount % of Total Amount % of Total
------------ ----------- ----------- ----------
Domestic $ 17.8 84.0% $ 18.1 85.5%
International 3.4 16.0% 3.1 14.5%
------------ ----------- ----------- ----------
Total $ 21.2 100.0% $ 21.2 100.0%
============ =========== =========== ==========
Nine months ended Nine months ended
September 30, 2002 September 30, 2001
------------------ ------------------
Amount % of Total Amount % of Total
------------ ----------- ----------- ----------
Domestic $ 53.3 85.2% $ 50.6 87.2%
International 9.2 14.8% 7.4 12.8%
------------ ----------- ----------- ----------
Total $ 62.5 100.0% $ 58.0 100.0%
============ =========== =========== ==========
Microtek's domestic revenues are generated through two primary channels or
customer categories: hospital branded and contract manufacturing (commonly
referred to as OEM). Also included in the Company's OEM revenues are sales of
8
products to custom procedure tray companies and other "non-branded" or private
label customers. Microtek's domestic revenues in the 2002 Quarter decreased by
$290,000 from the 2001 Quarter. This decrease was due to a decline of $914,000
in OEM revenues in the 2002 Quarter as compared to the 2001 Quarter. As
discussed above, OEM net revenues for the 2001 Quarter included a substantial
amount of order backlog assumed in conjunction with the Deka acquisition.
Revenues from such backlog were not recurring in the 2002 Quarter. Further, OEM
net revenues were negatively impacted by pricing pressures and declining sales
to a significant customer. Microtek's hospital branded net revenues for the 2002
Quarter increased by $624,000 from the 2001 Quarter. Growth in the CleanOp
product line acquired from Deka and in Microtek's core hospital branded revenues
continue to be offset by declines in safety product revenues resulting from
increased competitive pressures.
On a year-to-date basis, OEM revenues in the 2002 Period increased by $1.5
million or 6.6 percent from the 2001 Period due primarily to revenues from the
angiography drape and equipment drape product lines acquired from Deka. Hospital
branded net revenues in the 2002 Period were approximately $1.2 million higher
than in the 2001 Period due primarily to a $1.8 million increase in revenues
from the CleanOp product line acquired from Deka and to modest growth in
Microtek's core hospital branded product lines. These increases in hospital
branded net revenues were offset by a decrease of $1.6 million in safety
products revenues in the 2002 Period.
Microtek's international net revenues were $3.4 million for the 2002 Quarter, an
increase of $300,000 or 10.2 percent over the 2001 Quarter. International
revenues for the 2002 Period were $9.2 million, or $1.8 million more than the
$7.4 million reported for the 2001 Period. The improvements in the 2002 Quarter
and 2002 Period are attributable to international revenues stemming from the
Deka acquisition and internal growth of approximately 15 percent.
OTI's net revenues were $951,000 in the 2002 Quarter versus $631,000 in the 2001
Quarter. OTI's net revenues were approximately $2.0 million in the 2002 Period
as compared to $1.6 million in the 2001 Period. Licensing revenues in the 2002
Quarter and 2002 Period were $357,000 and $1.1 million, respectively, as
compared to $377,000 and $1.1 million in the 2001 Quarter and 2001 Period,
respectively. The Company will cease to recognize the non-cash licensing
revenues in December 2002. Included in OTI's net revenues for the 2002 Quarter
and 2002 Period were revenues related to its nuclear operations of approximately
$356,000 and $470,000, respectively. As announced in May 2002, the Company has
entered into an agreement with Eastern Technologies, Inc. ("ETI") and has
transferred most of the sales and marketing responsibilities for its OREX
nuclear product line to ETI. Under this agreement, ETI serves as the exclusive
licensee of OREX LaunderableTM products for sale in the United States and Canada
and a nonexclusive licensee of OTI's Certified SolubleTM products in that
territory. Additionally ETI serves as the exclusive operator of processing
services to the nuclear power industry for these products in the United States
and Canada.
Gross margins in the 2002 Quarter and 2002 Period were 38.7 percent and 39.7
percent, respectively, down from the margins of 41.4 percent recorded in the
2001 Quarter and 40.4 percent recorded in the 2001 Period. These margin declines
are attributable to the slightly dilutive nature of Microtek's OEM and
international businesses. Also contributing to the margin shortfall in 2002 were
costs of relocating certain of Microtek's domestic production to its offshore
plants. These costs include but are not limited to severance expenses.
Operating expenses as a percentage of net revenues in the 2002 Quarter were 30.9
percent versus 33.4 percent in the 2001 Quarter. For the 2002 Period, operating
expenses as a percentage of net revenues were 33.2 percent as compared to 34.8
percent for the 2001 Period. Selling, general and administrative expenses were
$6.6 million or 29.7 percent of net revenues in the 2002 Quarter, versus $6.5
million or 29.8 percent of net revenues in the 2001 Quarter. For the 2002
Period, selling, general and administrative expenses were $20.5 million or 31.8
percent of net revenues, as compared to $18.5 million or 30.9 percent of net
revenues in the 2001 Period. During the 2002 Quarter, the Company recorded
additional severance and reorganization costs of approximately $120,000,
bringing year-to-date severance costs to approximately $600,000. These severance
and restructuring expenses in the 2002 Period amount to approximately $0.01 per
basic and diluted share and have increased selling, general and administrative
expenses as a percentage of net revenues in 2002 by approximately 1.0 percent.
Additionally, the increases noted in the absolute dollar amount of selling,
9
general and administrative expenses and in selling, general and administrative
expenses as a percentage of net revenues in 2002 result from the Company's
expansion of its marketing focus and allocation of additional resources to
marketing its branded products.
Research and development expenses decreased by $227,000 and $708,000 in the 2002
Quarter and 2002 Period, respectively, as compared to the 2001 Quarter and 2001
Period, due to significant reductions in product development costs. The
reduction in research and development expenses reflects the Company's more
narrow focus on new market opportunities in the nuclear power industry for its
OREX Degradable products and new healthcare market opportunities for Microtek.
Amortization of intangibles in the 2002 Quarter and 2002 Period was $114,000 and
$342,000, respectively, a decrease of $281,000 from the 2001 Quarter and
$751,000 from the 2001 Period. These decreases result primarily from the
Company's adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002, at which time the Company ceased the amortization of its
goodwill. Had the provisions of SFAS No. 142 been in effect beginning on January
1, 2001, amortization of intangibles for the 2001 Quarter and 2001 Period would
have decreased by approximately $278,000 and $781,000, respectively. The
decrease attributable to non-amortization of goodwill in the 2002 Period was
offset slightly by the amortization of identifiable intangible assets acquired
in the Deka and MICROBasix acquisitions which were completed in the 2001 Period.
Income from operations for the 2002 Quarter and 2002 Period was $1.7 million and
$4.2 million, respectively, versus $1.8 million in the 2001 Quarter and $3.4
million in the 2001 Period. For the 2002 Quarter, Microtek's operating profit of
$1.7 million declined by $377,000 from the $2.1 million recorded in the 2001
Quarter. For the 2002 Period, Microtek's operating profit was $4.7 million,
approximately $255,000 less than the operating profit of $5.0 million recorded
in the 2001 Period. The Company's OTI division reported an operating income of
$32,000 in the 2002 Quarter versus an operating loss of $284,000 for the 2001
Quarter, an improvement of approximately 111.1 percent. OTI's operating loss in
the 2002 Period was $485,000, a 67.6 percent improvement over the operating loss
of $1.5 million recorded in the 2001 Period.
Interest expense, net of interest income, was $113,000 and $408,000 in the 2002
Quarter and 2002 Period, respectively, as compared to $184,000 and $338,000 in
the 2001 Quarter and 2001 Period, respectively. The $71,000 decrease in net
interest expense in the 2002 Quarter as compared to the 2001 Quarter is
attributable to lower average borrowings under the Company's lines of credit
facility during the 2002 Quarter. The $70,000 increase in net interest expense
in the 2002 Period as compared to the 2001 Period is the result of increased
interest expense resulting from higher average borrowings and lower interest
income on cash and cash equivalents due to lower average cash balances during
2002.
The Company's provision for income taxes in the 2002 Quarter and 2002 Period
reflects expense of $135,000 and $285,000, respectively. Due to the Company's
federal net operating loss carryforwards, this expense consists primarily of
state and foreign income taxes.
The resulting net income for the 2002 Quarter was $1.5 million, or $0.04 per
basic share and $0.03 per diluted share, bringing the Company's net income for
the 2002 Period to $3.6 million, or $0.09 per basic share and $0.08 per diluted
share. While the Company's net income for the 2002 Quarter is relatively
consistent with the net income reported for the 2001 Quarter, the Company's
earnings for the 2002 Period represent an increase of approximately $905,000, or
33.6 percent, over the net income reported for the 2001 Period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, the Company's cash and cash equivalents totaled $10.1
million as compared to $10.6 million at December 31, 2001.
During the 2002 Period, the Company's operating activities provided cash of $6.2
million as compared to cash used in operating activities of $4.1 million in the
2001 Period. The increase in cash provided by operating activities in the 2002
10
Period is attributable to the Company's increased profitability in the 2002
Period and improved working capital management, particularly in inventories.
Cash used in investing activities in the 2002 Period was $1.3 million, as
compared to $13.1 million in the 2001 Period. Investing activities in the 2002
Period consisted of the purchase of property and equipment. Investing activities
in the 2001 Period included the Deka and MICROBasix acquisitions which consumed
approximately $12.3 million in cash and purchases of property and equipment of
$758,000. During the 2002 Period, cash used in financing activities was $5.5
million. Repayments under the Company's Credit Agreement and other long-term
debt agreements in the 2002 Period totaled $5.9 million. Included in this amount
was 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
Period, the Company received $941,000 in proceeds from the exercise of stock
options and issuance of stock and purchased 335,000 shares of stock for
$647,000. Cash provided by financing activities in the 2001 Period was $12.2
million which consisted primarily of net borrowings under the Company's Credit
Agreement and other long-term debt agreements of $12.1 million.
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 inventory or (ii) $17.5 million, less any
outstanding letters of credit issued under the Credit Agreement. Outstanding
borrowings under the revolving credit facility were $6.9 million and $12.4
million at September 30, 2002 and December 31, 2001, respectively. As of
September 30, 2002, the Company had additional borrowing availability under the
revolving facility of $7.9 million. As of November 8, 2002, the Company's
borrowing availability under the revolving facility was $15.1 million, of which
the Company had borrowed $4.5 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 (5.25% at November 8, 2002) or LIBOR
plus an interest margin (4.16% at November 8, 2002). At September 30, 2002, 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 2002 and subsequent years.
CRITICAL ACCOUNTING POLICIES.
While the listing below is not inclusive of all of the Company's accounting
policies, the Company's management believes that the following policies are
those which are most critical and embody the most significant management
judgments and the uncertainties affecting their application and the likelihood
that materially different amounts would be reported under different conditions
or using different assumptions. These critical policies are:
Revenue Recognition. The Company's revenues are derived from the sale of its
products and are recognized at the time of shipment (i) when persuasive evidence
of a sale arrangement exists, (ii) delivery has occurred, (iii) the price is
fixed and determinable, and (iv) collectibility of the associated receivable is
reasonably assured. As discussed below, significant management judgments and
estimates must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
the Company's revenues for any period if management made different judgments or
utilized different estimates.
All sales of the Company's products are evidenced by a binding purchase order as
evidence of a sale arrangement. Sales through the Company's distributors are
evidenced by a master agreement which governs the relationship together with a
binding purchase order on a transaction by transaction basis. Delivery generally
occurs when the Company's products are delivered to a common carrier.
11
At the time of a sale transaction, the Company assesses whether the related
sales price is fixed and determinable based on the payment terms associated with
the transaction. Sales prices due within the Company's normal payment terms,
which are 30 to 60 days from the invoice date for its domestic customers and 90
to 120 days from the invoice date for international customers, are considered
fixed and determinable. The Company does not generally extend payment terms
outside its normal guidelines. The Company also assesses whether collection is
reasonably assured at the time of the sale transaction based on a number of
factors, including past transaction history with the customer and the
creditworthiness of the customer.
Sales Returns and Other Allowances and Allowance for Doubtful Accounts. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amount of assets 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.
Specifically, management must make estimates of potential future product returns
related to current period product revenues. The Company's sales arrangements do
not generally include acceptance provisions or clauses. Additionally, the
Company does not typically grant its distributors or other customers price
protection rights or rights to return products bought, other than normal and
customary rights of return for defects in materials or workmanship, and is not
obligated to accept product returns for any other reason. Actual returns have
not historically been significant. Management analyzes historical returns,
current economic trends and changes in customer demand when evaluating the
adequacy of its sales returns and other allowances.
Similarly, the Company's management must make estimates of the uncollectibility
of its accounts receivables. Management specifically analyzes accounts
receivable, historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in its customers' payment
terms when evaluating the adequacy of its allowance for doubtful accounts. The
Company's accounts receivables at September 30, 2002 totaled $16.8 million, net
of the allowance for doubtful accounts of $927,000.
Inventory Valuation. The preparation of the Company's financial statements
requires careful determination of the appropriate dollar amount of the Company's
inventory balances. Such amount is presented as a current asset in the Company's
balance sheet and is a direct determinant of cost of goods sold in the statement
of operations and therefore has a significant impact on the amount of net income
reported in an accounting period. The basis of accounting for inventories is
cost, which is the sum of expenditures and charges, both direct and indirect,
incurred to bring the inventory quantities to their existing condition and
location. The Company's inventories are stated at the lower of cost or market,
with cost determined using the first-in, first-out ("FIFO") method, which
assumes that inventory quantities are sold in the order in which they are
manufactured or purchased. The Company utilizes standard costs as a management
tool. The Company's standard cost valuation of its inventories is adjusted at
regular intervals to reflect the approximate cost of the inventory under FIFO.
The determination of the indirect charges and their allocation to the Company's
work-in-process and finished goods inventories is complex and requires
significant management judgment and estimates. Material differences may result
in the valuation of the Company's inventories and in the amount and timing of
the Company's cost of goods sold and resulting net income for any period if
management made different judgments or utilized different estimates.
On a periodic basis, management reviews its inventory quantities on hand for
obsolescence, physical deterioration, changes in price levels and the existence
of quantities on hand which may not reasonably be expected to be used or sold
within the normal operating cycles of the Company's operations. To the extent
that any of these conditions are believed to exist or the utility of the
inventory quantities in the ordinary course of business is no longer as great as
their carrying value, a reserve against the inventory valuation is established.
To the extent that this reserve is established or increased during an accounting
period, an expense is recorded in the Company's statement of operations,
generally in cost of goods sold. Significant management judgment is required in
determining the amount and adequacy of this reserve. In the event that actual
results differ from management's estimates or these estimates and judgments are
revised in future periods, the Company may need to establish additional reserves
which could materially impact the Company's financial position and results of
operation.
12
As of September 30, 2002, the Company's inventories totaled $25.3 million, net
of reserves for slow moving and obsolete inventories of $1.9 million. Management
believes that the Company's inventory valuation, together with the recorded
reserves for slow moving and obsolete inventories, results in carrying the
inventory at the lower of cost or market.
Accounting for Income Taxes. In conjunction with preparing the Company's
consolidated financial statements, management is required to estimate the
Company's income tax liability in each of the jurisdictions in which the Company
operates. This process involves estimating the Company's actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as goodwill amortization, for tax and accounting
purposes. These differences result in deferred tax assets or liabilities which
are reflected in the Company's consolidated balance sheet. Management must also
assess the likelihood that the Company's deferred tax assets will be recovered
from future taxable income. To the extent that management believes that recovery
is not likely, a valuation allowance must be established and reviewed in each
accounting period. Increases in the valuation allowance in an accounting period
requires that the Company record an expense within its tax provision in its
consolidated statement of operations.
Significant management judgment is required in determining the Company's
provision for income taxes, its deferred tax assets and liabilities and any
valuation allowance recorded against the Company's net deferred tax assets. At
September 30, 2002, the Company's net deferred tax assets totaled $2.0 million.
The Company has recorded a valuation allowance of $40.4 million as of September
30, 2002, due to uncertainties related to the Company's ability to utilize some
of its deferred tax assets, primarily consisting of net operating loss
carryforwards, before they expire. The valuation allowance is based on
management's estimates of taxable income by jurisdiction in which the Company
operates and the period over which the deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or these estimates
are adjusted in future periods, the Company may need to adjust this valuation
allowance which could materially impact the Company's financial position and
results of operation.
Valuation of Long-Lived and Intangible Assets and Goodwill. The Company assesses
the impairment of identifiable intangibles, long-lived assets and related
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors that are considered by management in
performing this assessment include, but are not limited to, the following:
o The Company's performance relative to historical or projected future
operating results;
o The Company's intended use of acquired assets or the Company's
strategy for its overall business; and
o Industry or economic trends.
In the event that the carrying value of intangibles, long-lived assets and
related goodwill is determined to be impaired, such impairment is measured using
a discount rate determined by management to be commensurate with the risk
inherent in the Company's current business model. At September 30, 2002, the net
book value of goodwill approximated $22.5 million and the net book value of
other intangible assets approximated $3.6 million.
As discussed in the footnotes to the condensed consolidated financial
statements, on January 1, 2002, the Company implemented SFAS No. 142, and as a
result, discontinued the periodic amortization of approximately $22.5 million of
goodwill but will continue to amortize other intangible assets. Goodwill
amortization for the full year of 2001 and the 2001 Period amounted to
approximately $1.1 million, or $0.03 per share, and $781,000, or $0.02 per
share, respectively. In lieu of amortization, the Company will be required to
perform an impairment review at least annually. The Company completed its
initial impairment review in the second quarter of 2002 and no impairment charge
was indicated.
13
FORWOARD 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, expected amortization expenses in 2002 and future
periods, the ability of the Company to meet its liquidity and capital
requirements, and management judgments about future events in the application of
its critical accounting policies as described under "Critical Accounting
Policies" above. 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 Technology", "-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 September 30, 2002, the Company had $7.4 million 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 $67,000 for the nine months ended September
30, 2002 and a 1% reduction in interest rates would have resulted in reduced
interest expense of approximately $67,000 for the nine months ended September
30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, 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, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic Securities and
Exchange Commission filings. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
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
In accordance with Section 10A of the Securities Exchange Act of 1934, as added
by Section 202 of the Sarbanes-Oxley Act of 2002, the Audit Committee of the
Board of Directors of the Company reviewed and approved the engagement of
Deloitte & Touche LLP, the Company's independent auditors, to provide non-audit
services to the Company associated with (1) the audit of the Company's 401(k)
Plan, (2) the preparation of the Company's 2001 federal and state income tax
returns, and (3) the review or approval, or both, of state and local real estate
ad valorem taxes on the Company's real property.
The Compensation Committee of the Board of Directors approved and adopted a
multiple component compensation plan for each of the Company's executive
officers, namely Dan R. Lee as President and Chief Executive Officer, James
Michael Mabry as Executive Vice President and Chief Operating Officer, and Roger
G. Wilson as Chief Financial Officer. The components of the program include a
three-year employment agreement, a policy to increase the executive's beneficial
ownership of the Company through periodic awards of vested stock options under
the Company's 1999 Long-Term Incentive Plan, the adoption of a Sale of Business
Bonus Program designed to increase shareholder value upon and in the event of a
change of control of the Company, and the adoption of a Long-Term Growth
Incentive Award Bonus Program designed to increase revenues of the Company while
maintaining and increasing the profitability of the Company.
Messrs. Lee, Mabry and Wilson are each a party to a three-year employment
agreement with the Company which commenced on October 20, 2002. Pursuant to each
such employment agreement, Mr. Lee will serve as President and Chief Executive
Officer of the Company, Mr. Mabry will serve as Executive Vice President and
Chief Operating Officer of the Company, and Mr. Wilson will serve as Chief
Financial Officer of the Company. Each employment agreement specifies a minimum
salary and benefits payable during the term of the employment agreement, and
contains restrictive covenants including covenants relating to the protection of
confidential information and restricting competition against the Company. Each
employment agreement is terminable by the Company or the employee with or
without cause. In the event of a termination of the employment agreement by the
Company without cause, or by the employee for good reason (as the terms "cause"
and "good reason" are defined), the employee will generally be entitled to
severance equal to the employee's salary and annual performance bonus for the
unexpired portion of the remaining term of the employment agreement and
continued welfare benefits (such as health insurance) for the unexpired term of
the employment agreement. In the event of any termination of the employee's
employment following a change of control (as defined) of the Company, other than
a termination of employment as a result of death or disability or cause, the
Company is obligated to pay the employee an amount equal to three times the
largest of the employee's annual salary and annual performance bonus over the
current or the prior two years plus certain other amounts primarily involving
the continuation of welfare benefits following the date of such termination of
employment. In the event that any payments to the employee will be subject to
excise taxes imposed under the Internal Revenue Code, then the payments to the
employee would be increased by an amount (i.e., a tax gross-up payment)
sufficient to pay all of the employee's excise taxes on such payments and any
income, excise or other taxes on the gross-up payment to the employee.
In connection with the completion of the aforementioned employment agreements,
the Company adopted a Sale of Business Bonus Program designed to increase the
value of the Company to shareholders upon and in the event of a change of
control of the Company. The Sale of Business Bonus Program establishes a bonus
pool determined as a percentage of appreciation in the price of the Company's
common stock from a pre-established base amount to the price of a share of the
15
Company's common stock at which the event constituting a change of control (as
defined) of the Company occurs. As currently adopted, the bonus pool uses the
following levels of share appreciation and percentage participation in such
share appreciation to fund the bonus pool:
Market Capitalization (Share Bonus
Share Appreciation Appreciation multiplied by 42M) Percentage Bonus Pool
------------------ ------------------------------- ---------- ---------------
$0.00 to $1.90 $ 80,598,000.00 0.00% $ 0.00
$1.90 to $5.00 $ 130,200,000.00 3.00% $ 3,906,000.00
$5.00 to $10.00 $ 210,000,000.00 3.50% $ 7,350,000.00
$10.00 to $11.00 $ 42,000,000.00 4.00% $ 1,680,000.00
----------------
Total Bonus Pool $ 12,936,000.00
================
The bonus pool may be allocated among employees of the Company as from
time-to-time determined by the Compensation Committee of the Board of Directors,
and the bonus program may be modified from time-to-time as determined by the
Board of Directors.
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
10.1 Second Amendment Agreement dated as of September 30, 2002,
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
10.2 Form of the Employment Agreement with the executive officers
of the Company
10.3 Consulting Agreement dated August ____, 2002, between
Microtek Medical Holdings, Inc. and Gene R. McGrevin
- ------------------
(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.
16
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 November 8, 2002.
MICROTEK MEDICAL HOLDINGS, INC.
By: /s/ Dan R. Lee
----------------------------------------------
Dan R. Lee
Chairman, President & Chief Executive Officer
(principal executive officer)
By: /s/ R.G. Wilson
----------------------------------------------
R. G. Wilson
Chief Financial Officer
(principal financial officer)
17
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: November 8, 2002 /s/ Dan R. Lee
---------------------------------------
Dan R. Lee
Chairman, President and Chief Executive Officer
18
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, R. 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: November 8, 2002 /s/ R.G. Wilson
---------------------------------------
R. G. Wilson
Chief Financial Officer, Treasurer and Assistant
19
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