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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
|
June 30, 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 August 4, 2004
|
| |
|
| Common Stock, $.001 par value
|
43,094,927
|
INDEX
PART I: FINANCIAL
INFORMATION
| |
Item 1. |
|
Financial
Statements |
| |
|
|
Unaudited
Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 |
| |
|
|
Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three
Months ended June 30, 2004 and June 30, 2003 and for the Six Months ended June 30, 2004
and June 30, 2003 |
| |
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2004
and June 30, 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 |
2
PART I
FINANCIAL INFORMATION
Item 1. Financial
Statements
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed
Consolidated Balance Sheets
(in thousands)
| Assets |
June 30, 2004
|
December 31, 2003
|
| Current assets: |
|
|
| |
|
| |
|
| Cash and cash equivalents | | |
$ | 6,879 |
|
$ | 9,462 |
|
| Accounts receivable, net | | |
| 17,875 |
|
| 16,331 |
|
| Other receivables | | |
| 298 |
|
| 287 |
|
| Inventories | | |
| 34,132 |
|
| 33,863 |
|
| Prepaid expenses and other assets | | |
| 4,051 |
|
| 4,268 |
|
|
|
|
| Total current assets | | |
| 63,235 |
|
| 64,211 |
|
|
|
|
| Property and equipment | | |
| 28,340 |
|
| 26,971 |
|
| Less accumulated depreciation | | |
| (19,744 |
) |
| (18,753 |
) |
|
|
|
| Property and equipment, net | | |
| 8,596 |
|
| 8,218 |
|
|
|
|
| Intangible assets, net | | |
| 37,865 |
|
| 30,488 |
|
| Deferred income taxes | | |
| 11,493 |
|
| 11,493 |
|
| Other assets | | |
| 4,548 |
|
| 3,889 |
|
|
|
|
| Total assets | | |
$ | 125,737 |
|
$ | 118,299 |
|
|
|
|
| Liabilities and Shareholders' Equity | | |
| Current liabilities: | | |
| Accounts payable | | |
$ | 8,928 |
|
$ | 7,277 |
|
| Accrued expenses | | |
| 3,582 |
|
| 3,942 |
|
| Current portion of long-term debt | | |
| 480 |
|
| 472 |
|
|
|
|
| Total current liabilities | | |
| 12,990 |
|
| 11,691 |
|
|
|
|
| Long-term debt, excluding current portion | | |
| 8,763 |
|
| 8,056 |
|
| Other long-term liabilities | | |
| 2,628 |
|
| 2,008 |
|
|
|
|
| Total liabilities | | |
| 24,381 |
|
| 21,755 |
|
|
|
|
| Shareholders' equity: | | |
| Common stock | | |
| 44 |
|
| 44 |
|
| Additional paid-in capital | | |
| 214,923 |
|
| 213,613 |
|
| Accumulated deficit | | |
| (110,783 |
) |
| (114,199 |
) |
| Accumulated other comprehensive income, net | | |
| 271 |
|
| 185 |
|
|
|
|
| | | |
| 104,455 |
|
| 99,643 |
|
| Treasury shares, at cost | | |
| (3,099 |
) |
| (3,099 |
) |
|
|
|
| Total shareholders' equity | | |
| 101,356 |
|
| 96,544 |
|
|
|
|
| Total liabilities and shareholders' equity | | |
$ | 125,737 |
|
$ | 118,299 |
|
|
|
|
See notes to unaudited condensed
consolidated financial statements.
3
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
|
Three months ended |
Six months ended |
|
June 30, 2004
|
June 30, 2003
|
June 30, 2004
|
June 30, 2003
|
| Net revenues |
|
|
$ | 30,157 |
|
$ | 24,874 |
|
$ | 59,454 |
|
$ | 47,860 |
|
| Cost of goods sold | | |
| 18,373 |
|
| 15,137 |
|
| 36,122 |
|
| 29,259 |
|
|
|
|
|
|
| Gross profit | | |
| 11,784 |
|
| 9,737 |
|
| 23,332 |
|
| 18,601 |
|
| Operating expenses: | | |
| Selling, general and administrative | | |
| 9,459 |
|
| 7,576 |
|
| 18,725 |
|
| 14,748 |
|
| Research and development | | |
| 246 |
|
| 259 |
|
| 508 |
|
| 478 |
|
| Amortization of intangibles | | |
| 158 |
|
| 108 |
|
| 306 |
|
| 225 |
|
|
|
|
|
|
| Total operating expenses | | |
| 9,863 |
|
| 7,943 |
|
| 19,539 |
|
| 15,451 |
|
|
|
|
|
|
| Income from operations | | |
| 1,921 |
|
| 1,794 |
|
| 3,793 |
|
| 3,150 |
|
| | | |
| Interest income | | |
| 14 |
|
| 22 |
|
| 31 |
|
| 49 |
|
| Interest expense | | |
| (70 |
) |
| (78 |
) |
| (141 |
) |
| (143 |
) |
| Equity in earnings of investee | | |
| 22 |
|
| 2 |
|
| 24 |
|
| 23 |
|
|
|
|
|
|
| Income before income taxes | | |
| 1,887 |
|
| 1,740 |
|
| 3,707 |
|
| 3,079 |
|
| | | |
| Income tax provision | | |
| 195 |
|
| (1,467 |
) |
| 291 |
|
| (2,325 |
) |
|
|
|
|
|
| |
|
|
|
|
| Net income | | |
$ | 1,692 |
|
$ | 3,207 |
|
$ | 3,416 |
|
$ | 5,404 |
|
|
|
|
|
|
| Other comprehensive income (loss): | | |
| Foreign currency translation gain (loss), net | | |
| (33 |
) |
| 141 |
|
| 31 |
|
| 69 |
|
| Unrealized gain (loss) on available for sale | | |
| securities, net | | |
| 60 |
|
| (17 |
) |
| 55 |
|
| 6 |
|
|
|
|
|
|
| Comprehensive income | | |
$ | 1,719 |
|
$ | 3,331 |
|
$ | 3,502 |
|
$ | 5,479 |
|
|
|
|
|
|
| Net income per common share - | | |
| Basic and Diluted | | |
$ | 0.04 |
|
$ | 0.08 |
|
$ | 0.08 |
|
$ | 0.13 |
|
|
|
|
|
|
| Basic weighted average number of common | | |
| shares outstanding | | |
| 42,974 |
|
| 42,063 |
|
| 42,874 |
|
| 42,089 |
|
|
|
|
|
|
| Diluted weighted average number of common | | |
| shares outstanding | | |
| 44,571 |
|
| 42,759 |
|
| 44,529 |
|
| 42,763 |
|
|
|
|
|
|
See notes to unaudited condensed
consolidated financial statements.
4
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
(in thousands)
|
Six months ended
June 30, 2004
|
Six months ended
June 30, 2003
|
| Cash flows from operating activities: |
|
|
| |
|
| |
|
| Net income | | |
$ | 3,416 |
|
$ | 5,404 |
|
| Adjustments to reconcile net income to net cash provided by | | |
| operating activities: | | |
| Depreciation | | |
| 1,064 |
|
| 1,115 |
|
| Amortization of intangibles | | |
| 306 |
|
| 225 |
|
| Provision for doubtful accounts | | |
| 338 |
|
| 429 |
|
| Deferred income taxes | | |
| -- |
|
| (2,515 |
) |
| Other | | |
| (24 |
) |
| (23 |
) |
| Changes in operating assets and liabilities, net of | | |
| acquisitions | | |
| 1,586 |
|
| (2,352 |
) |
|
|
|
| Net cash provided by operating activities | | |
| 6,686 |
|
| 2,283 |
|
|
|
|
| Cash flows from investing activities: | | |
| Purchase of and deposits for property and equipment | | |
| (991 |
) |
| (1,240 |
) |
| Investment in International Medical Products | | |
| (9,454 |
) |
| -- |
|
| Investment in OrthoPlast | | |
| (413 |
) |
| -- |
|
|
|
|
| Net cash used in investing activities | | |
| (10,858 |
) |
| (1,240 |
) |
|
|
|
| Cash flows from financing activities: | | |
| Net borrowings (repayments) under credit agreement | | |
| 943 |
|
| (809 |
) |
| Changes in bank overdraft | | |
| (467 |
) |
| 237 |
|
| Repayments under notes payable | | |
| (228 |
) |
| (6 |
) |
| Proceeds from exercise of stock options | | |
| 885 |
|
| 149 |
|
| Repurchase of treasury stock | | |
| -- |
|
| (497 |
) |
| Proceeds from issuance of common stock | | |
| 425 |
|
| 298 |
|
|
|
|
| Net cash provided by (used in) financing activities | | |
| 1,558 |
|
| (628 |
) |
|
|
|
| Effect of exchange rate changes on cash | | |
| 31 |
|
| 69 |
|
|
|
|
| Net (decrease) increase in cash and cash equivalents | | |
| (2,583 |
) |
| 484 |
|
| Cash and cash equivalents at beginning of period | | |
| 9,462 |
|
| 9,823 |
|
|
|
|
| Cash and cash equivalents at end of period | | |
$ | 6,879 |
|
$ | 10,307 |
|
|
|
|
See notes to unaudited condensed
consolidated financial statements.
5
MICROTEK MEDICAL
HOLDINGS, INC.
Notes to Unaudited
Condensed Consolidated Financial Statements
| |
1. |
|
NATURE
OF BUSINESS AND BASIS OF PRESENTATION |
| |
Microtek
Medical Holdings, Inc. and subsidiaries (the “Company”) develop, manufacture,
and market proprietary and other products and services for patient care, occupational
safety and management of potentially infectious and hazardous waste primarily for the
domestic healthcare market, which represents one business segment. The Company markets
its products to hospitals and other end users through a broad distribution system
consisting of multiple channels including distributors, directly through its own sales
force, original equipment manufacturers, and private label customers. The Company also
markets certain of its products through custom procedure tray companies. The Company’s
revenues are generated through two operating units, Microtek Medical, Inc. (“Microtek”),
a subsidiary of the Company, and OREX Technologies International (“OTI”), an
operating division. Microtek is the core business of the Company. OTI 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 six months ended June 30, 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. |
6
| |
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 | | |
| 795 |
|
| | |
| Identifiable intangible assets | | |
| 187 |
|
| | |
| Accounts payable | | |
| (730 |
) |
| | |
| 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 six months of 2004. |
7
| |
Effective
May 28, 2004, Microtek acquired selected fixed assets and inventories related to certain
businesses of International Medical Products B.V. and affiliates (collectively, “IMP”)
from Cardinal Health for approximately $9.5 million in cash, including acquisition costs.
The fixed assets and inventories acquired were recorded at estimated fair values totaling
approximately $2.0 million, as determined by the Company’s management based on
information currently available. The Company is currently evaluating the fair value of
other assets acquired, principally any identifiable intangible assets. Accordingly, the
preliminary allocation of the purchase price, which tentatively resulted in goodwill of
$7.5 million, is subject to revision based on the final determination of other fair
values. |