| For Quarter Ended | June 30, 2003 | Commission File No. 0-24866 |
MICROTEK MEDICAL HOLDINGS,
INC.
(Exact name of Registrant as specified in its charter)
| Georgia | 58-1746149 |
| (State or other jurisdiction of 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 August 8, 2003 |
| Common Stock, $.001 par value | 42,128,230 |
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
| Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 |
| Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months ended June 30, 2003 and June 30, 2002 and for the Six Months ended June 30, 2003 and June 30, 2002 |
| Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2003 and June 30, 2002 |
| Notes to Unaudited Condensed Consolidated Financial Statements |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securityholders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
MICROTEK MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
| June 30, 2003 |
December 31, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 10,307 | $ | 9,823 | ||||
| Accounts receivable, net | 16,708 | 15,029 | ||||||
| Other receivables | 281 | 448 | ||||||
| Inventories | 26,616 | 24,794 | ||||||
| Prepaid expenses and other assets | 3,248 | 1,486 | ||||||
| Total current asset | 57,160 | 51,580 | ||||||
| Property and equipment | 24,509 | 23,312 | ||||||
| Less accumulated depreciation | (17,731 | ) | (16,659 | ) | ||||
| Property and equipment, net | 6,778 | 6,653 | ||||||
| Intangible assets, net | 29,314 | 29,392 | ||||||
| Deferred income taxes | 6,130 | 5,638 | ||||||
| Other assets | 3,344 | 3,433 | ||||||
| Total assets | $ | 102,726 | $ | 96,696 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 6,599 | $ | 5,118 | ||||
| Accrued expenses | 3,228 | 3,281 | ||||||
| Current portion of long-term debt | 225 | 231 | ||||||
| Total current liabilities | 10,052 | 8,630 | ||||||
| Long-term debt, net of current portion | 6,327 | 7,136 | ||||||
| Other long-term liabilities | 2,032 | 2,044 | ||||||
| Total liabilities | 18,411 | 17,810 | ||||||
| Shareholders' equity: | ||||||||
| Common stock | 43 | 43 | ||||||
| Additional paid-in capital | 211,953 | 211,505 | ||||||
| Accumulated deficit | (124,819 | ) | (130,222 | ) | ||||
| Cumulative translation adjustment | 87 | 18 | ||||||
| Unrealized loss on available for sale securities | (99 | ) | (105 | ) | ||||
| 87,165 | 81,239 | |||||||
| Treasury shares, at cost | (2,850 | ) | (2,353 | ) | ||||
| Total shareholders' equity | 84,315 | 78,886 | ||||||
| Total liabilities and shareholders' equity | $ | 102,726 | $ | 96,696 | ||||
See notes to unaudited condensed consolidated financial statements.
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MICROTEK MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
| Three months ended June 30, 2003 |
Three months ended June 30, 2002 |
Six months ended June 30, 2003 |
Six months ended June 30, 2002 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $ | 24,874 | $ | 20,816 | $ | 47,860 | $ | 41,640 | ||||||
| Licensing revenues | -- | 356 | -- | |||||||||||
| Net revenues | 24,874 | 21,172 | 47,860 | 42,353 | ||||||||||
| Cost of goods sold | 15,137 | 12,707 | 29,259 | 25,292 | ||||||||||
| Gross profit | 9,737 | 8,465 | 18,601 | 17,061 | ||||||||||
| Operating expenses: | ||||||||||||||
| Selling, general and administrative | 7,576 | 7,173 | 14,748 | 13,917 | ||||||||||
| Research and development | 259 | 254 | 478 | 417 | ||||||||||
| Amortization of intangibles | 108 | 114 | 225 | 228 | ||||||||||
| Total operating expenses | 7,943 | 7,541 | 15,451 | 14,562 | ||||||||||
| Income from operations | 1,794 | 924 | 3,150 | 2,499 | ||||||||||
| Interest income | 22 | 38 | 49 | 75 | ||||||||||
| Interest expense | (78 | ) | (175 | ) | (143 | ) | (370 | ) | ||||||
| Equity in earnings of investee | 2 | 17 | 23 | 17 | ||||||||||
| Other income | -- | 47 | -- | 47 | ||||||||||
| Income before income taxes | 1,740 | 851 | 3,079 | 2,268 | ||||||||||
| Income tax (benefit) expense | (1,467 | ) | 61 | (2,325 | ) | 150 | ||||||||
| Net income | $ | 3,207 | $ | 790 | $ | 5,404 | $ | 2,118 | ||||||
| Other comprehensive income (loss): | ||||||||||||||
| Foreign currency translation gain | 141 | 162 | 69 | 109 | ||||||||||
| Unrealized gain (loss) on available | ||||||||||||||
| for sale securities | (17 | ) | (16 | ) | 6 | (23 | ) | |||||||
| Comprehensive income | $ | 3,331 | $ | 936 | $ | 5,479 | $ | 2,204 | ||||||
| Net income per common share - | ||||||||||||||
| Basic and Diluted | $ | 0.08 | $ | 0.02 | $ | 0.13 | $ | 0.05 | ||||||
| Basic weighted average number of | ||||||||||||||
| common shares outstanding | 42,063 | 42,252 | 42,089 | 42,184 | ||||||||||
| Diluted weighted average number of | ||||||||||||||
| common shares outstanding | 42,759 | 43,184 | 42,763 | 43,058 | ||||||||||
See notes to unaudited condensed consolidated financial statements.
3
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
(in thousands)
| Six months ended June 30, 2003 |
Six months ended June 30, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities: | ||||||||
| Net income | $ | 5,404 | $ | 2,118 | ||||
| Adjustments to reconcile net income to net cash provided by | ||||||||
| operating activities: | ||||||||
| Depreciation | 1,115 | 1,229 | ||||||
| Amortization of intangibles | 225 | 228 | ||||||
| Provision for doubtful accounts | 429 | 113 | ||||||
| Accretion of licensing revenues | -- | (713 | ) | |||||
| Deferred income taxes | (2,515 | ) | -- | |||||
| Other | (23 | ) | 58 | |||||
| Changes in operating assets and liabilities | (2,352 | ) | 1,465 | |||||
| Net cash provided by operating activities | 2,283 | 4,498 | ||||||
| Cash flows from investing activities - | ||||||||
| purchase of and deposits for property and equipment | (1,240 | ) | (981 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net repayments under credit agreements | (809 | ) | (4,556 | ) | ||||
| Changes in bank overdraft | 237 | (83 | ) | |||||
| Repayments under notes payable | (6 | ) | (420 | ) | ||||
| Proceeds from exercise of stock options | 149 | 483 | ||||||
| Repurchase of treasury stock | (497 | ) | (112 | ) | ||||
| Proceeds from issuance of common stock | 298 | 360 | ||||||
| Net cash used in financing activities | (628 | ) | (4,328 | ) | ||||
| Effect of exchange rate changes on cash | 69 | 109 | ||||||
| Net increase (decrease) in cash and cash equivalents | 484 | (702 | ) | |||||
| Cash and cash equivalents at beginning of period | 9,823 | 10,587 | ||||||
| Cash and cash equivalents at end of period | $ | 10,307 | $ | 9,885 | ||||
See notes to unaudited condensed consolidated financial statements.
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| 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 sells 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 sells certain of its products to custom procedure tray companies. The Company’s revenues are generated through two operating units, Microtek Medical, Inc. (“Microtek”), a subsidiary of the Company, and OREX Technologies International (“OTI”), an operating division. Microtek is the core business of the Company. OTI is seeking to commercialize its patented technology in the nuclear industry. |
| The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. |
| The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the information furnished reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Results for the interim periods are not necessarily indicative of results to be expected for the full year. The consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (the “Annual Report”). |
| 2. | 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. For the six months ended June 30, 2003, there were no material changes to any of the critical accounting policies contained therein. |
| 3. | Inventories |
| Inventories are stated at the lower of cost or market. The first-in first-out (“FIFO”) valuation method is used to determine the cost of inventories. Cost includes material, labor and manufacturing overhead for manufactured and assembled goods and materials only for goods purchased for resale. Inventories are summarized by major classification at June 30, 2003 and December 31, 2002 as follows: |
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| June 30, 2003 |
December 31, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| Raw materials | $ | 10,960 | $ | 10,454 | ||||
| Work-in-progress | 1,158 | 1,009 | ||||||
| Finished goods | 14,498 | 13,331 | ||||||
| Inventories | $ | 26,616 | $ | 24,794 | ||||
| At June 30, 2003 and December 31, 2002, the OTI inventories approximated $2.7 million and $2.2 million, respectively. Included in OTI inventories at June 30, 2003 and December 31, 2002 were finished goods of $1.3 million and $431,000, respectively, and raw materials of $1.4 million and $1.7 million, respectively. |
| 4. | Acquisitions |
| Effective November 29, 2002, Microtek acquired the surgical drape product line of Gyrus ENT, LLC. This acquisition was accounted for under the purchase method, and accordingly, the results of operations related to the acquired assets have been included in the accompanying consolidated financial statements from the date of acquisition. The preliminary allocation of the total estimated purchase price of approximately $4.2 million in cash, as adjusted through June 30, 2003 and subject to adjustment in 2003 until finalized, resulted in approximately $3.5 million of goodwill as follows (in thousands): |
| Total estimated purchase consideration | $ | 4,185 | ||||||
| Allocated to: | ||||||||
| Inventories | $ | 625 | ||||||
| Property and equipment | 50 | |||||||
| Total allocation | 675 | |||||||
| Goodwill | $ | 3,510 | ||||||
| 5. | Investment in Available for Sale Securities |
| In February 2000, the Company paid $249,000 for approximately a 7.5% interest in Consolidated Ecoprogress Technology, Inc., a Canadian technology marketing company focused on developing and selling biodegradable and disposable absorbent products such as diapers, feminine hygiene, adult incontinence and other products. This investment is classified in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, as available for sale securities and is stated at fair value. Unrealized gains and losses in the investment’s fair value are recorded as a separate component of shareholders’ equity, and unrealized losses that are other than temporary are recognized in net income. During the quarter ended September 30, 2002, the Company recognized an impairment loss of $55,000 related to an other-than-temporary decline in the value of this investment. There were no such impairment losses recognized during the six months ended June 30, 2003. The fair value of this investment as of June 30, 2003 and December 31, 2002 was $95,000 and $89,000, respectively. |
| 6. | Long-Term Debt |
| The Credit Agreement. The Company maintains a credit agreement between the Company and a Bank (the “Credit Agreement”). As amended to date, the Credit Agreement provides for a $17.5 million revolving credit facility, which matures on June 30, 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. 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 June 30, 2003) or LIBOR plus an interest margin (2.78% at June 30, 2003). Borrowing availability under the revolving facility at June 30, 2003 and December 31, 2002 was $13.4 million and $14.7 million, respectively. There were outstanding borrowings under the revolving credit facility of $6.3 million at June 30, 2003 and $7.1 million at December 31, 2002. Borrowings under the Credit Agreement are collateralized by the Company’s accounts receivable, inventories, equipment, the Company’s stock of its subsidiaries and certain of the Company’s plants and offices. |
6
| 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 June 30, 2003 and December 31, 2002, the Company was in compliance with all of its financial covenants under the Credit Agreement. |
| The Credit Agreement provides for the issuance of up to $1.0 million in letters of credit. There were no outstanding letters of credit at June 30, 2003 or December 31, 2002. The Credit Agreement also provides for a fee of 0.375% per annum on the unused commitment, an annual collateral monitoring fee of $35,000 and an outstanding letter of credit fee of 2.0% per annum. |
| Other Long-Term Debt. The Company is obligated under certain long-term leases and notes payable, which aggregated $225,000 and $231,000 at June 30, 2003 and December 31, 2002, respectively. These obligations bear interest at rates ranging from 4.75% to 11.9% and mature on various dates through October 2003. The acquisition notes payable aggregating $225,000 at June 30, 2003 and December 31, 2002, respectively, are subordinated to the Credit Agreement. |
| The carrying value of long-term debt at June 30, 2003 and December 31, 2002 approximates fair value based on interest rates that are believed to be available to the Company for debt with similar prepayment provisions provided for in the existing debt agreements. |
| 7. | Earnings Per Share |
| Earnings per share is calculated in accordance SFAS 128, Earnings Per Share, which requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. Basic per share income is computed using the weighted average number of common shares outstanding for the period. Diluted per share income is computed including the dilutive effect of all contingently issuable shares. Dilutive potential common shares are calculated in accordance with the treasury st |