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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, 2005
|
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.)
|
13000 DEERFIELD
PARKWAY, SUITE 300
ALPHARETTA, GA 30004
(Address of principal executive offices)
(678) 896-4000
(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 by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
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 6, 2005
|
| |
|
| Common Stock, $.001 par value
|
43,290,033
|
INDEX
| PART I: |
|
FINANCIAL
INFORMATION |
| Item 1. |
|
Financial
Statements: |
| |
Unaudited
Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 |
| |
Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three
Months ended March 31, 2005 and March 31, 2004 |
| |
Unaudited
Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2005
and March 31, 2004 |
| |
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. |
|
Unregistered
Sales of Equity Securities and Use of Proceeds |
| Item 3. |
|
Defaults
Upon Senior Securities |
| Item 4. |
|
Submission
of Matters to a Vote of Security Holders |
| Item 5. |
|
Other
Information |
2
PART I
FINANCIAL INFORMATION
Item 1. Financial
Statements
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
| Assets |
March 31,
2005
|
December 31, 2004
|
| Current assets: |
|
|
| |
|
| |
|
| Cash and cash equivalents | | |
$ | 8,783 |
|
$ | 8,964 |
|
| Accounts receivable, net | | |
| 18,578 |
|
| 18,162 |
|
| Other receivables | | |
| 797 |
|
| 842 |
|
| Inventories | | |
| 34,702 |
|
| 32,823 |
|
| Prepaid expenses and other assets | | |
| 3,500 |
|
| 3,539 |
|
|
| |
| |
| Total current assets | | |
| 66,360 |
|
| 64,330 |
|
|
| |
| |
| Property and equipment | | |
| 29,040 |
|
| 28,770 |
|
| Less accumulated depreciation | | |
| (21,108 |
) |
| (20,550 |
) |
|
| |
| |
| Property and equipment, net | | |
| 7,932 |
|
| 8,220 |
|
|
| |
| |
| Intangible assets, net | | |
| 38,279 |
|
| 38,951 |
|
| Deferred income taxes | | |
| 13,962 |
|
| 13,962 |
|
| Other assets | | |
| 5,691 |
|
| 5,606 |
|
|
| |
| |
| Total assets | | |
$ | 132,224 |
|
$ | 131,069 |
|
|
| |
| |
| Liabilities and Shareholders' Equity | | |
| Current liabilities: | | |
| Accounts payable | | |
$ | 8,292 |
|
$ | 8,825 |
|
| Accrued expenses | | |
| 5,345 |
|
| 6,191 |
|
| Current portion of long-term debt | | |
| 495 |
|
| 495 |
|
|
| |
| |
| Total current liabilities | | |
| 14,132 |
|
| 15,511 |
|
|
| |
| |
| Long-term debt, excluding current portion | | |
| 5,344 |
|
| 4,984 |
|
| Other long-term liabilities, excluding current portion | | |
| 1,984 |
|
| 1,931 |
|
|
| |
| |
| Total liabilities | | |
| 21,460 |
|
| 22,426 |
|
|
| |
| |
| Shareholders' equity: | | |
| Common stock | | |
| 45 |
|
| 45 |
|
| Additional paid-in capital | | |
| 215,607 |
|
| 215,268 |
|
| Accumulated deficit | | |
| (102,177 |
) |
| (104,278 |
) |
| Accumulated other comprehensive income, net of | | |
| income taxes | | |
| 388 |
|
| 707 |
|
|
| |
| |
| | | |
| 113,863 |
|
| 111,742 |
|
| Treasury shares, at cost | | |
| (3,099 |
) |
| (3,099 |
) |
|
| |
| |
| Total shareholders' equity | | |
| 110,764 |
|
| 108,643 |
|
|
| |
| |
| Total liabilities and shareholders' equity | | |
$ | 132,224 |
|
$ | 131,069 |
|
|
| |
| |
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
March 31, 2005
|
Three months ended
March 31, 2004
|
| Net revenues |
|
|
$ | 33,743 |
|
$ | 29,297 |
|
| Cost of goods sold | | |
| 19,999 |
|
| 17,749 |
|
|
| |
| |
| Gross profit | | |
| 13,744 |
|
| 11,548 |
|
|
| |
| |
| Operating expenses: | | |
| Selling, general and administrative | | |
| 10,549 |
|
| 9,266 |
|
| Research and development | | |
| 253 |
|
| 262 |
|
| Amortization of intangibles | | |
| 246 |
|
| 148 |
|
|
| |
| |
| Total operating expenses | | |
| 11,048 |
|
| 9,676 |
|
|
| |
| |
| Income from operations | | |
| 2,696 |
|
| 1,872 |
|
|
| |
| |
| Interest income | | |
| 18 |
|
| 17 |
|
| Interest expense | | |
| (77 |
) |
| (71 |
) |
| Equity in earnings of investee | | |
| 106 |
|
| 2 |
|
| Foreign currency exchange loss | | |
| (377 |
) |
| -- |
|
|
| |
| |
| Income before income taxes | | |
| 2,366 |
|
| 1,820 |
|
|
| |
| |
| Income tax provision | | |
| 265 |
|
| 96 |
|
|
| |
| |
|
| |
| |
| Net income | | |
$ | 2,101 |
|
$ | 1,724 |
|
|
| |
| |
| Other comprehensive income (loss): | | |
| Foreign currency translation gain (loss), net | | |
| of income taxes | | |
| (290 |
) |
| 64 |
|
| Unrealized loss on available for sale | | |
| securities, net of income taxes | | |
| (29 |
) |
| (5 |
) |
|
| |
| |
| Comprehensive income | | |
$ | 1,782 |
|
$ | 1,783 |
|
|
| |
| |
| Net income per common share - | | |
| Basic and Diluted | | |
$ | 0.05 |
|
$ | 0.04 |
|
|
| |
| |
| Basic weighted average number of common shares | | |
| outstanding | | |
| 43,244 |
|
| 42,774 |
|
|
| |
| |
| Diluted weighted average number of common shares | | |
| outstanding | | |
| 44,468 |
|
| 44,568 |
|
|
| |
| |
See notes to unaudited condensed
consolidated financial statements.
4
MICROTEK MEDICAL
HOLDINGS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
|
Three months ended
March 31, 2005
|
Three months ended
March 31, 2004
|
| Cash flows from operating activities: |
|
|
| |
|
| |
|
| Net income | | |
$ | 2,101 |
|
$ | 1,724 |
|
|
|
|
| Adjustments to reconcile net income to net cash provided by | | |
| operating activities: | | |
| Depreciation | | |
| 561 |
|
| 546 |
|
| Amortization of intangibles | | |
| 246 |
|
| 148 |
|
| Provision for doubtful accounts | | |
| 170 |
|
| 196 |
|
| Other | | |
| (122 |
) |
| (2 |
) |
| Changes in operating assets and liabilities, net of | | |
| acquisitions | | |
| (2,716 |
) |
| 60 |
|
|
|
|
| Net cash provided by operating activities | | |
| 240 |
|
| 2,672 |
|
|
|
|
| Cash flows from investing activities: | | |
| Purchase of and deposits for property and equipment | | |
| (284 |
) |
| (390 |
) |
| Acquisition of OrthoPlast | | |
| -- |
|
| (413 |
) |
|
|
|
| Net cash used in investing activities | | |
| (284 |
) |
| (803 |
) |
|
|
|
| Cash flows from financing activities: | | |
| Borrowings under line of credit agreement | | |
| 28,959 |
|
| 22,487 |
|
| Repayments under line of credit agreement | | |
| (28,476 |
) |
| (24,031 |
) |
| Changes in bank overdraft | | |
| (1,045 |
) |
| (418 |
) |
| Repayments under notes payable | | |
| (123 |
) |
| (119 |
) |
| Proceeds from exercise of stock options | | |
| 3 |
|
| 650 |
|
| Proceeds from issuance of common stock | | |
| 336 |
|
| 302 |
|
|
|
|
| Net cash used in financing activities | | |
| (346 |
) |
| (1,129 |
) |
|
|
|
| Effect of exchange rate changes on cash | | |
| 209 |
|
| 64 |
|
|
|
|
| Net increase (decrease) in cash and cash equivalents | | |
| (181 |
) |
| 804 |
|
| Cash and cash equivalents at beginning of period | | |
| 8,964 |
|
| 9,462 |
|
|
|
|
| Cash and cash equivalents at end of period | | |
$ | 8,783 |
|
$ | 10,266 |
|
|
|
|
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”) manufactures and
supplies innovative product solutions for patient care, occupational safety and
management of infectious and hazardous waste for the 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. Since 2002, OTI has focused on commercializing its OREX
patented technology in the nuclear industry. As described in Note 5 to these unaudited
condensed consolidated financial statements, in September 2004, the Company entered into
an agreement which grants to Eastern Technologies, Inc. a worldwide exclusive license to
manufacture, use and sell the Company’s OREX materials and processing technology in
the nuclear industry and homeland security industry, and for certain other industrial
applications. |
| |
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, 2004 (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, 2005, there have been no material changes to any of the
Company’s critical accounting policies. |
| 3. |
|
NEWLY
ISSUED ACCOUNTING STANDARDS |
| |
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials (spoilage)
should be recognized as current period charges in all circumstances. In addition, SFAS
No. 151 requires that allocation of fixed production overhead to inventory be based on
the normal capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company does not
expect that the adoption of SFAS No. 151 will have a significant effect on the Company’s
consolidated financial position, results of operations or cash flows. |
6
| |
In
December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment which revised
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R)
establishes accounting requirements for share-based compensation to employees and carries
forward prior guidance on accounting for awards to non-employees. Specifically, SFAS No.
123(R) requires that public companies recognize compensation expense in an amount equal
to the fair value of the share-based payments. SFAS No. 123(R) is effective with respect
to the Company beginning with the first quarter of 2006. SFAS No. 123(R) permits
companies to adopt its requirements using either the “modified prospective” method
or the “modified retrospective” method. The Company is still evaluating which
transition method to utilize. As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using Accounting Principles Board (“APB”)
Opinion No. 25‘s intrinsic value method and, as such, recognizes no compensation
expense for employee stock options. Accordingly, the adoption of SFAS No. 123(R)‘s
fair value method will have an impact on the Company’s results of operations,
although it will have no significant impact on the Company’s overall financial
position. The impact of adopting SFAS No. 123(R) cannot be predicted at this time because
it will depend on levels of share-based payments granted in the future. However, had we
adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net
income and diluted net income per share in Note 11 to these unaudited condensed
consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation expense to be reported as a financing
cash flow activity, rather than as an operating cash flow activity as required under
current literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. The Company cannot estimate what
those amounts will be in the future because they depend on, among other things, when
employees exercise stock options. |
| |
In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS
No. 153 amends the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged and more broadly provides for exceptions
regarding exchanges of nonmonetary assets that do not have commercial substance. SFAS No.
153 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company does not expect that the adoption of SFAS No. 153 will
have a significant effect on the Company’s consolidated financial position, results
of operations or cash flows. |
| |
Each
of the following acquisitions was accounted for as a business combination in accordance
with SFAS 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
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
$419,000 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 $600,000 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 are probable of being 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 three months ended March 31, 2005 or 2004. |
| |
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 $9.6 million in cash, including acquisition costs,
and an accrued liability for certain employee costs of 400,000 EURO, or approximately
$491,000. The purchase price was allocated to the assets acquired and liability assumed,
based on their respective estimated fair values, as follows: |
7
|
|
|
| Purchase price paid as: |
|
|
|
|
|
| |
|
| Cash | | |
| | |
$ | 9,628 |
|
| Accrued employee liability | | |
| | |
| 491 |
|
|
|
| |
| Total purchase consideration | | |
| | |
| 10,119 |
|
| Allocated to: | | |
| Inventories | | |
$ 1,816 | | |
| |
|
| Property and equipment | | |
186 | | |
| |
|
| Identifiable intangible assets | | |
2,883 | | |
| |
|
|
|
| |
| Total allocation | | |
| | |
| 4,885 |
|
|
|
| |
| Goodwill | | |
| | |
$ | 5,234 |
|
|
|
| |
| |
Identifiable
intangible assets included customer lists of approximately $2.3 million (useful life of
15 years), non-compete agreements of approximately $219,000 (useful life of five years)
and other intangible assets of approximately $362,000 (useful life of four years). The
preliminary allocation of the purchase price is subject to adjustment in 2005 when
finalized. |
| |
The
following unaudited pro forma financial information for the three months ended March 31,
2005 and 2004 reflects the Company’s results of operations as if the IMP acquisition
had been completed on January 1, 2004 (in thousands, except per share data): |
|
Three months ended
|
|
March 31, 2005
|
March 31, 2004
|
| Net revenues |
|
|
$ | 33,743 |
|
$ | 32,701 |
|
| Net income | | |
$ | 2,101 |
|
$ | 2,129 |
|
| Net income per share - basic and diluted | | |
$ | 0.05 |
|
$ | 0.05 |
|
| |
The
pro forma financial information is based on estimates and assumptions which management
believes are reasonable. However, the pro forma results are not necessarily indicative of
the operating results that would have occurred had the IMP acquisition been consummated
as of the date indicated, nor are they necessarily indicative of future operating
results. |
| |
In
September 2004, the Company entered into an agreement (the “License Agreement”)
which grants to Eastern Technologies, Inc. (“ETI”) a worldwide exclusive
license to manufacture, use and sell the Company’s OREX materials and processing
technology in the nuclear industry and homeland security industry, and for certain other
industrial applications. Under the terms of the License Agreement, the Company will
receive license royalties equal to $75,000 per quarter for the first three years of the
agreement. Thereafter and generally until the expiration of the underlying patents
related to the product or service generating the subject royalties, the Company will
receive license royalties equal to the greater of: (i) generally 5% of net sales, as
defined in the agreement, or (ii) $300,000 per year. The royalty rate is subject to
downward adjustment in certain events with respect to net sales of certain products. The
Company also entered into an exclusive three-year supply agreement (the “Supply
Agreement”) under which the Company has agreed to provide certain sourcing and
supply chain management services to ETI, and ETI has agreed to purchase a total of
approximately $4.8 million of inventory over the term of the Supply Agreement. For these
services, the Company will receive management fees totaling $2.7 million, $600,000 of
which was received at the signing of the Supply Agreement. The balance of the management
fees are payable in quarterly installments of $175,000 beginning December 31, 2004 and at
the end of each quarter thereafter until September 30, 2007. The cash payment of $600,000
was recorded as deferred revenue (included in accrued expenses, a current liability) upon
receipt. This amount, together with all future management fees collected from ETI, will
be recognized into income ratably over the term of the Supply Agreement as nuclear
finished goods inventories on hand are sold to ETI. At March 31, 2005, amounts recognized
into income exceeded cash receipts from ETI by approximately $184,000, which amount was
recorded in the accompanying unaudited condensed consolidated balance sheet in prepaid
expenses and other current assets. At December 31, 2004, cash receipts from ETI exceeded
amounts recognized into income by $221,000, which amount was recorded in the accompanying
unaudited condensed consolidated balance sheet in accrued expenses (current liability). |
8
| 6. |
|
SALE
OF INVENTORIES TO RELATED PARTY |
| |
In
September 2004, the Company entered into an agreement with Global Resources
International, Inc. (“GRI”), a related party as described in Note 7 below, for
the sale of certain of its raw material inventories used in the manufacture of finished
goods for sale to the nuclear industry. At closing, the Company received cash proceeds of
$200,000 and a promissory note in the amount of $1.051 million. The promissory note bears
interest at 5% and is to be repaid ratably as the raw material inventories purchased by
GRI in the transaction are consumed by GRI, with payments of principal in an amount not
less than 25% of the original principal amount per year. The total gain on the sale of
these raw material inventories approximated $467,000. Of this total gain, approximately
$91,000, an amount commensurate with the Company’s relative ownership interest in
GRI, was deferred and is being recognized into income as the raw material inventories
purchased by GRI in the transaction are sold by GRI. During the three months ended March
31, 2005, approximately $16,000 of this deferred gain was recognized into income. |
| 7. |
|
INVESTMENT
IN AFFILIATED COMPANY |
| |
In
May 2000, the Company and certain of its affiliates and employees organized GRI. From its
manufacturing facilities located in China, GRI provides certain material sourcing and
manufacturing of various Microtek’s products where such supply arrangements are
advantageous to Microtek based on favorable pricing and other considerations. The Company
and a non-executive member of the Company’s management own 19.5 percent and 30
percent, respectively, of GRI. Accordingly, the Company accounts for its investment in
GRI under the equity method. The Company’s investment in GRI was approximately
$406,000 and $300,000 at March 31, 2005 and December 31, 2004, respectively. The Company
recorded $106,000 and $2,000 of income during the three months ended March 31, 2005 and
2004, respectively, related to this investment. |
| |
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, 2005 and December 31, 2004 as follows (in thousands): |
|
March 31, 2005
|
December 31, 2004
|
| Raw materials |
|
|
$ | 13,052 |
|
$ | 11,550 |
|
| Work-in-progress | |