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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
|
March 31, 2004
|
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
incorporation or organization)
|
(IRS Employer
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 7, 2004
|
| |
|
| Common Stock, $.001 par value
|
42,952,667
|
INDEX
| PART I: |
FINANCIAL INFORMATION |
| Item 1. |
Financial Statements |
| |
Unaudited
Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 |
| |
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months ended March 31,
2004 and March 31, 2003 |
| |
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2004 and March 31, 2003
|
| |
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 |
PART I
FINANCIAL INFORMATION
Item 1. Financial
Statements
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed
Consolidated Balance Sheets
(in thousands)
| Assets |
March 31, 2004
|
December 31, 2003
|
| Current assets: |
|
|
| |
|
| |
|
| Cash and cash equivalents | | |
$ | 10,266 |
|
$ | 9,462 |
|
| Accounts receivable, net | | |
| 18,215 |
|
| 16,331 |
|
| Other receivables | | |
| 177 |
|
| 287 |
|
| Inventories | | |
| 32,915 |
|
| 33,863 |
|
| Prepaid expenses and other assets | | |
| 4,087 |
|
| 4,268 |
|
|
|
|
| Total current assets | | |
| 65,660 |
|
| 64,211 |
|
|
|
|
| Property and equipment | | |
| 27,603 |
|
| 26,971 |
|
| Less accumulated depreciation | | |
| (19,299 |
) |
| (18,753 |
) |
|
|
|
| Property and equipment, net | | |
| 8,304 |
|
| 8,218 |
|
|
|
|
| Intangible assets, net | | |
| 30,552 |
|
| 30,488 |
|
| Deferred income taxes | | |
| 11,493 |
|
| 11,493 |
|
| Other assets | | |
| 3,374 |
|
| 3,889 |
|
|
|
|
| Total assets | | |
$ | 119,383 |
|
$ | 118,299 |
|
|
|
|
| Liabilities and Shareholders' Equity | | |
| Current liabilities: | | |
| Accounts payable | | |
$ | 8,254 |
|
$ | 7,277 |
|
| Accrued expenses | | |
| 3,066 |
|
| 3,942 |
|
| Current portion of long-term debt | | |
| 471 |
|
| 472 |
|
|
|
|
| Total current liabilities | | |
| 11,791 |
|
| 11,691 |
|
|
|
|
| Long-term debt, excluding current portion | | |
| 6,394 |
|
| 8,056 |
|
| Other long-term liabilities | | |
| 1,919 |
|
| 2,008 |
|
|
|
|
| Total liabilities | | |
| 20,104 |
|
| 21,755 |
|
|
|
|
| Shareholders' equity: | | |
| Common stock | | |
| 44 |
|
| 44 |
|
| Additional paid-in capital | | |
| 214,565 |
|
| 213,613 |
|
| Accumulated deficit | | |
| (112,475 |
) |
| (114,199 |
) |
| Accumulated other comprehensive income, net | | |
| 244 |
|
| 185 |
|
|
|
|
| | | |
| 102,378 |
|
| 99,643 |
|
| Treasury shares, at cost | | |
| (3,099 |
) |
| (3,099 |
) |
|
|
|
| Total shareholders' equity | | |
| 99,279 |
|
| 96,544 |
|
|
|
|
| Total liabilities and shareholders' equity | | |
$ | 119,383 |
|
$ | 118,299 |
|
|
|
|
See notes to unaudited condensed
consolidated financial statements.
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except
per share data)
|
Three months ended
March 31, 2004
|
Three months ended
March 31, 2003
|
| Net revenues |
|
|
$ | 29,297 |
|
$ | 22,986 |
|
| Cost of goods sold | | |
| 17,749 |
|
| 14,122 |
|
|
|
|
| Gross profit | | |
| 11,548 |
|
| 8,864 |
|
| Operating expenses: | | |
| Selling, general and administrative | | |
| 9,266 |
|
| 7,172 |
|
| Research and development | | |
| 262 |
|
| 219 |
|
| Amortization of intangibles | | |
| 148 |
|
| 117 |
|
|
|
|
| Total operating expenses | | |
| 9,676 |
|
| 7,508 |
|
|
|
|
| Income from operations | | |
| 1,872 |
|
| 1,356 |
|
| Interest income | | |
| 17 |
|
| 27 |
|
| Interest expense | | |
| (71 |
) |
| (65 |
) |
| Equity in earnings of investee | | |
| 2 |
|
| 21 |
|
|
|
|
| Income before income taxes | | |
| 1,820 |
|
| 1,339 |
|
| Income tax expense (benefit) | | |
| 96 |
|
| (858 |
) |
|
|
|
| Net income | | |
$ | 1,724 |
|
$ | 2,197 |
|
|
|
|
| Other comprehensive income (loss): | | |
| Foreign currency translation gain (loss), net | | |
| 64 |
|
| (72 |
) |
| Unrealized gain (loss) on available for sale | | |
| securities, net | | |
| (5 |
) |
| 23 |
|
|
|
|
| Comprehensive income | | |
$ | 1,783 |
|
$ | 2,148 |
|
|
|
|
| Net income per common share - | | |
| Basic | | |
$ | 0.04 |
|
$ | 0.05 |
|
|
|
|
| Diluted | | |
$ | 0.04 |
|
$ | 0.05 |
|
|
|
|
| Basic weighted average number of common | | |
| shares outstanding | | |
| 42,774 |
|
| 42,115 |
|
|
|
|
| Diluted weighted average number of common | | |
| shares outstanding | | |
| 44,568 |
|
| 42,775 |
|
|
|
|
See notes to unaudited condensed
consolidated financial statements.
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
(in thousands)
|
Three months ended
March 31, 2004
|
Three months ended
March 31, 2003
|
| Cash flows from operating activities: |
|
|
| |
|
| |
|
| Net income | | |
$ | 1,724 |
|
$ | 2,197 |
|
|
|
|
| Adjustments to reconcile net income to net cash provided by | | |
| operating activities: | | |
| Depreciation | | |
| 546 |
|
| 571 |
|
| Amortization of intangibles | | |
| 148 |
|
| 117 |
|
| Provision for doubtful accounts | | |
| 196 |
|
| 288 |
|
| Deferred income taxes | | |
| -- |
|
| (929 |
) |
| Other | | |
| (2 |
) |
| (21 |
) |
| Changes in operating assets and liabilities | | |
| 60 |
|
| (1,957 |
) |
|
|
|
| Net cash provided by operating activities | | |
| 2,672 |
|
| 266 |
|
|
|
|
|
|
|
| Cash flows from investing activities: | | |
| Purchase of and deposits for property and equipment | | |
| (390 |
) |
| (561 |
) |
| Investment in OrthoPlast | | |
| (413 |
) |
| -- |
|
|
|
|
| Net cash used in investing activities | | |
| (803 |
) |
| (561 |
) |
|
|
|
|
|
|
| Cash flows from financing activities: | | |
| Net (repayments) borrowings under credit agreement | | |
| (1,544 |
) |
| 150 |
|
| Changes in bank overdraft | | |
| (418 |
) |
| 724 |
|
| Repayments under notes payable | | |
| (119 |
) |
| (6 |
) |
| Proceeds from exercise of stock options | | |
| 650 |
|
| 54 |
|
| Repurchase of treasury stock | | |
| -- |
|
| (241 |
) |
| Proceeds from issuance of common stock | | |
| 302 |
|
| 207 |
|
|
|
|
| Net cash provided by (used in) financing activities | | |
| (1,129 |
) |
| 888 |
|
|
|
|
|
|
|
| Effect of exchange rate changes on cash | | |
| 64 |
|
| (72 |
) |
|
|
|
|
|
|
| Net increase in cash and cash equivalents | | |
| 804 |
|
| 521 |
|
|
|
|
| Cash and cash equivalents at beginning of period | | |
| 9,462 |
|
| 9,823 |
|
|
|
|
|
|
|
| Cash and cash equivalents at end of period | | |
$ | 10,266 |
|
$ | 10,344 |
|
|
|
|
|
|
|
See notes to unaudited condensed
consolidated financial statements.
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 has recently
commercialized 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 generally accepted accounting principles 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, 2003 (the “Annual Report”). |
| 2. |
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 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. During
the three months ended March 31, 2004, there have been no material changes to any of the
Company’s critical accounting policies. |
| 3. |
NEWLY
ISSUED ACCOUNTING STANDARDS |
| |
In
January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51. In December 2003, the FASB
published a revision to Interpretation No. 46 (46R) to clarify some of the provisions of
the original Interpretation. This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation. Under the new
guidance, special effective date provisions apply to enterprises that have fully or
partially applied Interpretation 46 prior to issuance of this revised Interpretation.
Otherwise, application of Interpretation 46R is required in financial statements of
public entities that have interests in structures that are commonly referred to as
special-purpose entities for periods ending after December 15, 2003. Application by
public entities, other than small business issuers, for all other types of variable
interest entities is required in financial statements for periods ending after March 15,
2004. The adoption of the provisions of this Interpretation for 2003 and 2004 had no
effect on the Company’s consolidated financial statements. |
5
| |
Each
of the following acquisitions was accounted for as a business combination in accordance
with Statement of Financial Accounting Standards No. 141, Business Combinations.
Accordingly, the results of operations related to the acquired assets have been included
in the accompanying unaudited condensed consolidated financial statements from their
respective acquisition date. |
| |
Effective
November 1, 2003, Microtek acquired substantially all of the assets of Plasco, Inc. (“Plasco”),
a manufacturer and marketer of multi-line disposable medical device products. The
preliminary allocation of the total estimated purchase price of approximately $3.4
million is subject to adjustment in 2004 when finalized and is summarized as follows (in
thousands): |
|
|
|
| Purchase price paid as: |
|
|
| |
|
|
|
|
| Cash | | |
| |
|
$ 2,569 | | |
| Note payable (note 6) | | |
| |
|
866 | | |
|
|
|
| Total purchase consideration | | |
| |
|
3,435 | | |
| Allocated to: | | |
| Accounts receivable | | |
$ | 1,056 |
|
| | |
| Inventories | | |
| 2,050 |
|
| | |
| Other current assets | | |
| 111 |
|
| | |
| Property and equipment | | |
| 770 |
|
| | |
| Identifiable intangible assets | | |
| 185 |
|
| | |
| Accounts payable | | |
| (703 |
) |
| | |
| Other liabilities | | |
| (34 |
) |
| | |
|
|
|
| Total allocation | | |
| |
|
3,435 | | |
|
|
|
| Goodwill | | |
| |
|
$ -- | | |
|
|
|
| |
Effective
March 1, 2004, Microtek acquired substantially all of the assets of Ortho/Plast, Inc. (“OrthoPlast”),
a marketer of a small line of orthopedic products. The purchase price of approximately
$413 thousand in cash, including certain acquisition costs, was allocated to accounts
receivable, inventories, property and equipment and identifiable intangibles (principally
trademarks and customer list) based on those assets’respective estimated fair
values, with the excess allocated to goodwill. The amount allocated to goodwill was not
significant. The terms of the related purchase agreement also provide for additional cash
consideration up to $600 thousand if future revenues from the Company’s orthopedic
product line exceed certain targeted levels, as defined in the agreement, through 2009.
The additional consideration will be recorded when it is determinable that such target
revenues have been met and is expected to result in additional goodwill. The acquisition
of OrthoPlast on March 1, 2004, did not have a material impact on the Company’s
consolidated results of operations for the first quarter of 2004. |
6
| |
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, 2004 and December 31, 2003 as follows (in thousands): |
|
March 31, 2004
|
December 31, 2003
|
| Raw materials |
|
|
$ | 11,901 |
|
$ | 12,257 |
|
| Work-in-progress | | |
| 1,943 |
|
| 1,789 |
|
| Finished goods | | |
| 19,071 |
|
| 19,817 |
|
|
|
|
| Total inventories | | |
$ | 32,915 |
|
$ | 33,863 |
|
|
|
|
| |
At
March 31, 2004 and December 31, 2003, OREX inventories approximated $5.1 million and $5.4
million, respectively. Included in the OREX inventories at March 31, 2004 and December
31, 2003 were finished goods of $3.7 million and $3.9 million, respectively, and raw
materials of $1.4 million and $1.5 million, respectively. |
| |
The
Credit Agreement. The Company maintains a credit agreement with 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, 2006. 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 (4.5% at March 31, 2004) or LIBOR plus an interest margin
(2.6% at March 31, 2004). Borrowing availability under the revolving facility at March
31, 2004 and December 31, 2003 was $15.6 million and $15.1 million, respectively. There
were outstanding borrowings under the revolving credit facility of $5.6 million at March
31, 2004 and $7.2 million at December 31, 2003. 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, 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, 2004 and December 31, 2003, 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, 2004 or December 31, 2003. 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 lease arrangements
and notes payable which aggregated $431,000 and $474,000 at March 31, 2004 and December
31, 2003, respectively. In addition, in conjunction with the Plasco acquisition described
in Note 4, the Company originally signed a Promissory Note in the principal amount of
$1.1 million. This principal amount was reduced in December 2003 to $866,000 as a result
of adjustments made to the original purchase price. This note payable balance, including
accrued interest, amounted to $798,000 and $$873,000 at March 31, 2004 and December 31,
2003, respectively, bears interest at 6% and is payable in quarterly payments of
principal and interest through October 2006. This note payable arrangement is
subordinated to the Credit Agreement. |
7
| |
The
carrying value of long-term debt at March 31, 2004 and December 31, 2003 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. |
| |
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 exercise proceeds 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,
|
|
2004
|
2003
|
| Basic Shares |
|
|
| 42,774 |
|
| 42,115 |
|
| Dilutive Shares (due to stock options) | | |
| 1,794 |
|
| 660 |
|
|
|
|
| Diluted Shares | | |
| 44,568 |
|
| 42,775 |
|
|
|
|
| |
Options
to purchase approximately 758 thousand shares were outstanding at March 31, 2003 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. There were no such antidilutive shares for
the three months ended March 31, 2004. |
| 8. |
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: |
8
|
Three months ended
March 31,
|
|
2004
|
2003
|
| Dividend yield |
|
0 |
.0% |
0 |
.0% |
| Expected volatility | |
19 |
.0% |
9 |
.0% |
| Risk free interest rate | |
3 |
.9% |
3 |
.9% |
| 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 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,
|
|
2004
|
2003
|
| Net income, as reported |
|
|
$ 1,724 |
|
|
$ | 2,197 |
|
| Deduct: Total stock-based employee | | |
| compensation expense determined under | | |
| fair value based method for all awards, | | |
| net of related tax effects | | |
(563 | ) | |
| (317 |
) |
|
|
|
| Pro forma net income | | |
$ 1,161 | | |
$ | 1,880 |
|
|
|
|
| Net income per share: | | |
| Basic - as reported | | |
$ 0.04 | | |
$ | 0 |
.05 |
|
|
|
| Diluted - as reported | | |
$ 0.04 | | |
$ | 0 |
.05 |
|
|
|
| Basic - pro forma | | |
$ 0.03 | | |
$ | 0 |
.04 |
|
|
|
| Diluted - pro forma | | |
$ 0.03 | | |
$ | 0 |
.04 |
|
|
|
| 9. |
STOCK
REPURCHASE PROGRAM |
| |
In
December 2003, 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, 2004. A total of 100 thousand shares were repurchased under this
program during the three months ended March 31, 2003. There were no shares repurchased
during the three months ended March 31, 2004. As of March 31, 2004, the Company had
repurchased approximately 1.3 million shares for an aggregate repurchase price of
approximately $2.7 million. |
9
| 10. |
COMMITMENTS
AND CONTINGENCIES |
| |
The
Company is involved in routine litigation and proceedings in the ordinary course of
business. Management believes that pending litigation matters will not have a material
adverse effect on the Company’s consolidated financial position or results of
operations. |
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
General
The Company has two primary
operating units. Substantially all of the Company’s operations are conducted through
Microtek which manufactures and sells infection control products, fluid control products,
safety products and other products to healthcare professionals for use in environments
such as operating rooms and ambulatory surgical centers. OTI focuses on the
commercialization of the Company’s OREX degradable products and disposal
technologies to the nuclear power generating industry. Effective November 1, 2003,
Microtek acquired substantially all of the assets of Plasco, Inc. (“Plasco”), a
manufacturer and marketer of multi-line disposable medical device products. Effective
March 1, 2004, Microtek acquired substantially all of the assets of Ortho/Plast, Inc. (“OrthoPlast”),
a marketer of a small line of orthopedic products. The acquisition of OrthoPlast did not
have a material impact on the Company’s consolidated results of operations for the
first quarter of 2004 and is not expected to have a material impact on the Company’s
consolidated results of operations in the near term.
Quarter Ended March 31,
2004 Compared to Quarter Ended March 31, 2003
Net revenues for the three months
ended March 31, 2004 (the “2004 Quarter”) were $29.3 million, an increase of
$6.3 million or 27.5 percent from the $23.0 million of net revenues reported for the three
months ended March 31, 2003 (the “2003 Quarter”).
For the 2004 Quarter, Microtek’s
net revenues totaled $27.3 million, an increase of $5.7 million or 26.6 percent over
Microtek’s net revenues of $21.6 million in the 2003 Quarter. Included in
Microtek’s revenues for the 2004 Quarter was approximately $2.2 million in revenues
from its Plasco division which was acquired effective November 1, 2003. The following
tables depict Microtek’s domestic and international revenues and the relative
percentage of each to Microtek’s total revenues for the 2004 Quarter and 2003
Quarter:
|
Three months ended
March 31, 2004
|
Three months ended
March 31, 2003
|
|
Amount
|
% of Total
|
Amount
|
% of Total
|
| Domestic |
|
|
$ | 23 |
.5 |
| 86 |
.1% |
$ | 18 |
.1 |
| 83 |
.9% |
| International | | |
| 3 |
.8 |
| 13 |
.9% |
| 3 |
.5 |
| 16 |
.1% |
|
|
|
|
|
| Total | | |
$ | 27 |
.3 |
| 100 |
.0% |
$ | 21 |
.6 |
| 100 |
.0% |
|
|
|
|
|
Microtek’s domestic revenues are
generated through two primary channels or customer categories: branded hospital and
contract manufacturing (commonly referred to as OEM). Included in the Company’s OEM
revenues are sales of products to custom procedure tray companies and other
“non-branded” or private label customers. Hospital branded revenues were 53.7
percent and OEM revenues were 46.3 percent of total domestic revenues in the 2004 Quarter
as compared to 57.0 percent and 43.0 percent, respectively, in the 2003 Quarter.
Microtek’s domestic revenues in
the 2004 Quarter increased by $5.4 million over corresponding revenues in the 2003 Quarter
due to an increase of $941 thousand, or 9.1 percent, in Microtek’s branded hospital
revenues, an increase of $2.2 million, or 28.9 percent, in Microtek’s OEM revenues
and revenues of $2.2 million generated by Microtek’s Plasco division. Branded
hospital revenue growth in the 2004 Quarter over the 2003 Quarter was demonstrated in
Microtek’s CleanOp product line (an increase of $833 thousand or 47.8 percent) and
its domestic equipment and patient drape business (an increase of $211 thousand or 3.4
percent). Microtek’s safety product revenues declined by approximately $140 thousand
in the 2004 Quarter as the impact of the sale of certain of the Company’s
non-strategic safety product lines in September 2003 (the Company recorded approximately
$305 thousand in revenues for those non-strategic products in the 2003 Quarter with no
corresponding revenues in the 2004 Quarter) exceeded revenue growth in the Company’s
remaining safety product revenues during the 2004 Quarter of $175 thousand.
Microtek’s international net revenues were $3.8 million for the 2004 Quarter, an
increase of $325 thousand from the 2003 Quarter.
10
OTI’s net revenues were $2.0
million in the 2004 Quarter versus $1.4 million in the 2003 Quarter, substantially all of
which related to OTI’s nuclear operations. The growth of OTI’s revenues is
attributable to growing nuclear industry usage and acceptance of the OREX products.
Gross profit margins in the 2004
Quarter were 39.4 percent, relatively consistent with gross profit margins of 38.6 percent
recorded in the 2003 Quarter.
Operating expenses in the 2004
Quarter were 33.0 percent of net revenues versus 32.7 percent of net revenues in the 2003
Quarter. Selling, general and administrative expenses were $9.3 million or 31.6 percent of
net revenues in the 2004 Quarter versus $7.2 million or 31.2 percent of net revenues in
the 2003 Quarter. The increases in the absolute dollar amount of selling, general and
administrative expenses in the 2004 Quarter are primarily attributable to operating
expenses of the Plasco division and higher distribution and other variable selling costs
associated with increased revenues in the 2004 Quarter.
Research and development expenses in
the 2004 Quarter increased slightly to $262 thousand from $219 thousand in the 2003
Quarter primarily as a result of Microtek’s expanded product development program
which includes numerous product enhancements and new product introductions planned for
2004 and 2005.
Amortization of intangibles in the
2004 Quarter was $148 thousand, a slight increase over $117 in the 2003 Quarter. This
increase stems primarily from the amortization of OTI patent costs recorded in September
2003 and certain intangibles acquired in the Plasco acquisition in November 2003.
Income from operations for the 2004
Quarter was $1.9 million, versus $1.4 million in the 2003 Quarter. For the 2004 Quarter,
Microtek’s income from operations of $1.7 million exceeded its income from operations
recorded in the 2003 Quarter by $243 thousand, or 17.2 percent. The Company’s OTI
division reported operating income in the 2004 Quarter of $215 thousand, as compared to an
operating loss of $58 thousand for the 2003 Quarter.
Interest expense, net of interest
income, of $54 thousand in the 2004 Quarter increased slightly from $38 thousand in the
2003 Quarter due to additional interest expense related to the Company’s long-term
debt, primarily as a result of the Plasco acquisition in November 2003, and lower interest
income on cash and cash equivalents resulting from lower average interest rates.
The Company’s provision for
income taxes in the 2004 Quarter reflects income tax expense of $96 thousand consisting
entirely of the Company’s state and foreign tax provisions for the quarter. This
compares to a net income tax benefit of approximately $858 thousand for the 2003 Quarter.
During the 2003 Quarter, the Company recorded a non-cash deferred income tax benefit of
approximately $929 thousand, or $0.02 per diluted share, related to the decrease in the
Company’s valuation allowance with respect to certain of its deferred tax assets.
Offsetting this income tax benefit in the 2003 Quarter was the Company’s state and
foreign income tax provision of approximately $71 thousand. The Company did not record any
deferred income tax benefit in the 2004 Quarter.
The resulting net income for the 2004
Quarter was $1.7 million, or $0.04 per basic and diluted share, as compared to $2.2
million, or $0.05 per basic and diluted share reported for the 2003 Quarter. Excluding the
non-cash deferred income tax benefit recorded in the 2003 Quarter of $929 thousand, the
Company’s net income for the 2004 Quarter increased over the 2003 Quarter by
approximately $456 thousand or 36.0 percent.
11
Liquidity and Capital
Resources
As of March 31, 2004 and December 31,
2003, the Company’s cash and cash equivalents totaled $10.3 million and $9.5 million,
respectively. The Company’s cash flow activity in the 2004 Quarter and the 2003
Quarter were as follows (in thousands):
|
Three months ended
March 31,
|
|
2004
|
2003
|
| Cash provided by operating activities |
|
|
$ | 2,672 |
|
$ | 266 |
|
| Cash used in investing activities | | |
| (803 |
) |
| (561 |
) |
| Cash provided by (used in) financing activities | | |
| (1,129 |
) |
| 888 |
|
During the 2004 Quarter, the
Company’s operating activities generated cash of $2.7 million compared to $266
thousand in the 2003 Quarter. The improvement in operating cash flow in the 2004 Quarter
is principally attributable to improved net income, net of deferred income taxes in the
2003 Quarter, plus disciplined working capital management activities which resulted in a
net change in operating assets and liabilities of $60 thousand for the 2004 Quarter.
During the 2004 Quarter, a $1.6 million increase in accounts receivable and a net decrease
of $1.2 million in inventories, prepaid expenses and other assets were substantially
matched against a $1.4 million increase in accounts payable and a net decrease in accrued
compensation and other liabilities of $1.0 million. During the 2003 Quarter, a significant
portion of the Company’s operating cash flow was used to fund working capital
expansion related to the commercialization of OTI’s nuclear business and
Microtek’s expanding operations, particularly in accounts receivable and inventory.
Investing activities in the 2004
Quarter used $803 thousand in cash and consisted of purchases of capital property and
equipment of $390 thousand and cash consideration of $413 thousand for the OrthoPlast
acquisition. Cash used in investing activities in the 2003 Quarter included $561 thousand
in capital property and equipment additions.
During the 2004 Quarter, financing
activities used $1.1 million in cash. Net repayments under the Company’s Credit
Agreement in the 2004 Quarter were $1.5 million, and repayments of other long-term debt
agreements in the 2004 Quarter totaled $119 thousand. Offsetting these repayments were
proceeds of $650 thousand from the exercise of stock options and $302 thousand generated
from other stock issuances. Additionally, during the 2004 Quarter, the Company’s bank
overdraft decreased by $418 thousand. Cash provided by financing activities for the 2003
Quarter was $888 thousand comprised of an increase in the Company’s bank overdraft of
$724 thousand, net borrowings under the Company’s Credit Agreement of $150 thousand,
proceeds from the exercise of stock options of $54 thousand, and $207 thousand from other
stock issuances. Offsetting these amounts were repayments under other long-term debt
agreements of $6 thousand and the purchase of 100 thousand shares of stock for $241
thousand.
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, 2006. 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 $5.6 million and $7.2
million at March 31, 2004 and December 31, 2003, respectively. As of March 31, 2004, the
Company had additional borrowing availability under the revolving facility of $10.0
million. As of May 7, 2004, the Company’s total borrowing availability under the
revolving facility increased to $16.6 million, of which the Company had borrowed $5.5
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
(4.5% at May 7, 2004) or LIBOR plus an interest margin (2.60% at May 7, 2004). At March
31, 2004, 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. However, currently unforeseen future developments, potential acquisitions and
increased working capital requirements may require additional debt financing or issuance
of common stock in 2004 and subsequent years.
12
Off-Balance Sheet
Arrangements
The Company does not have any
off-balance sheets arrangements that have or are reasonably likely to have a current or
future effect on the Company’s financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
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 under the captions “-Reliance upon
Microtek”, “-History of Net Losses”, “-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”, “-Risks of Successfully Integrating
Acquisitions”, “-Small Sales and Marketing Force”, “-Reliance upon
Distributors”, “-Reliance Upon Large Customers”, “-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”. The Company does 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 operating results
and cash flows are subject to fluctuations from changes in interest rates and foreign
currency exchange rates. The Company’s cash and cash equivalents are short-term,
highly liquid investments with original maturities of three months or less. As a result of
the short-term nature of the Company’s cash and cash equivalents, a change of market
interest rates does not impact the Company’s operating results or cash flow. The
effect of foreign currency transactions has not historically been material to the
Company’s results of operations. The Company may in the future export or import
increased amounts of products payable in foreign currencies, exposing the Company to
increased risks on fluctuations in currency exchange rates.
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, 2004,
the Company had $5.6 million of long-term debt bearing interest at a floating rate
approximating the Prime Rate or LIBOR. Because these rates are variable, an increase or
decrease in the Company’s average interest rate of 10%, or approximately 27 basis
points, would have increased or decreased interest expense by less than $5 thousand for
the three months ended March 31, 2004.
The Company does not use derivative
instruments for trading purposes or to hedge its market risks, and the use of such
instruments would be subject to strict approvals by the Company’s senior officers.
Therefore, the Company’s exposure related to such derivative instruments is not
expected to be material to the Company’s financial position, results of operations or
cash flows.
13
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 its Chief Financial Officer, the
Company carried out an evaluation (the “Evaluation”) of the
effectiveness of the Company’s “disclosure controls and
procedures” (as defined in the Securities Exchange Act of 1934 Rules
13a-15(e) and 15d-15(e)). Based upon the Evaluation, the Company’s
President and Chief Executive Officer and its Chief Financial Officer have
concluded that the Company’s disclosure controls and procedures
provided reasonable assurance as of the end of the quarter for which this
report is being filed that (i) information required to be disclosed in the
Company’s reports under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and (ii) such information is
accumulated and communicated to the Company’s management, including
the Company’s President and Chief Executive Officer and its Chief
Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. |
| |
The
Company is committed to a continuing process of identifying, evaluating and implementing
improvements to the effectiveness of the Company’s disclosure and internal controls
and procedures. The Company’s management, including its President and Chief
Executive Officer and its Chief Financial Officer, does not expect that the Company’s
controls and procedures will prevent all errors. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all
control issues within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that breakdowns can
occur because of a simple error or mistake. Additionally, controls can be circumvented by
the individual acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may deteriorate. Because of
the inherent limitations in any control system, misstatements due to error or violations
of law may occur and not be detected. |
| (b) |
Changes
in internal controls. There have not been any changes in the Company’s
internal controls over financial reporting identified in connection with
the Evaluation that occurred during the Company’s last quarter that
has materially affected or, to the knowledge of management, is reasonably
likely to materially affect the Company’s internal controls. |
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. The Company
made no repurchases of equity securities during the quarter ended March 31, 2004.
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
|
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 |
Amended and Restated Bylaws of Microtek Medical Holdings, Inc. |
|
4.1(1) |
Specimen Certificate of Common Stock |
|
4.2 |
Seventh Amendment and Waiver Agreement dates as of March 4, 2004, to the Amended and Restated Credit Agreement dated as of May 14, 2001. |
|
31.1 |
Certification of Chief Executive Officer |
|
31.2 |
Certification of Chief Financial Officer |
|
32.1 |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
_________________
| |
(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. |
| |
On
February 6, 2004, the registrant furnished a Current Report on Form 8-K dated February 5,
2004 pursuant to Item 12 announcing the Company’s anticipated net revenues for the
quarter and year ended December 31, 2003. |
15
| |
On
February 24, 2004, the registrant furnished a Current Report on Form 8-K dated February
24, 2004 pursuant to Item 12 announcing the Company’s results of operations for the
quarter and year ended December 31, 2003. |
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 May 10,
2004.
| |
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)
|
17