Back to GetFilings.com



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

4. ACQUISITIONS

  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

5. INVENTORIES

  Inventories are stated at the lower of cost or market. The first-in first-out (“FIFO”) valuation method is used to determine the cost of inventories. Cost includes material, labor and manufacturing overhead for manufactured and assembled goods and materials only for goods purchased for resale. Inventories are summarized by major classification at March 31, 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.

6. LONG-TERM DEBT

  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.

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 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