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. As described in Note 8 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. Subject to the terms
and conditions of this licensing agreement, OTI no longer sells OREX products
to
the nuclear power 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 unaudited condensed 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, 2006 (the “Annual Report”).
|
2.
|
PENDING
ACQUISITION TRANSACTION
|
On
August
7, 2007, the Company and Ecolab Inc. (Ecolab) entered into a definitive
agreement and plan of merger whereby Ecolab will acquire the Company in a cash
transaction. Under the terms of the agreement, the Company’s
shareholders will receive $6.30 for each share of common stock outstanding
as of
the closing date of the transaction, which is expected to occur as soon as
practicable following the Company’s meeting of shareholders scheduled for
November 9, 2007, subject to obtaining the required approval of shareholders
at
that meeting. Completion of the transaction is contingent upon
various conditions, which are more fully set forth in the merger agreement,
including, among other things, approval of the transaction by the Company’s
shareholders and other customary closing conditions.
|
3.
|
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 on Form 10-K for the year ended
December 31, 2006 are those that depend most heavily on these judgments and
estimates. During the three months and nine months ended September
30, 2007, there have been no material changes to any of the Company’s critical
accounting policies.
|
4.
|
NEWLY
ISSUED ACCOUNTING
STANDARDS
|
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48,
Accounting for Uncertainty in Income Taxes – An interpretation of
FASB Statement No. 109
(“FIN 48”) which clarifies the
accounting and disclosure requirements for uncertainty in tax positions, as
defined. The Company’s adoption of the provisions of FIN 48 on
January 1, 2007 had no impact on the Company’s consolidated financial
statements. The Company examined its tax positions for all open tax
years through December 31, 2006 and the full benefit of each tax position has
been recognized in the financial statements in accordance with FIN
48. On any future tax positions, the Company intends to record
interest and penalties, if any, as a component of interest expense and general
and administrative expenses, respectively. The Company’s tax years
are open for U.S. Federal purposes from 2004 through 2006. Certain
U.S. state tax years remain open for 2003 and 2006
filings. International statutes vary widely and the open years range
from 2004 through 2006. Taxing authorities have the ability to review
prior tax years to the extent of net operating loss and tax credit carryforwards
to open tax years.
|
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 158,
Employer’s Accounting for Defined Benefit Pension and
Other Postretirement Plans – an amendment of FASB Statements No. 87, 88,
106, and 132(R)
(“SFAS No. 158”). SFAS No. 158 requires
companies to recognize the funded status of defined benefit pension
and
other postretirement plans as a net asset or liability in its statement
of
financial position and to recognize changes in that funded status
in the
year in which the changes occur through comprehensive income to the
extent
that those changes are not included in the net periodic
cost. The funded status of a defined benefit pension plan is
measured as the difference between the fair value of plan assets
and the
projected benefit obligation under the plan. Additionally, SFAS
No. 158 requires companies to measure the funded status of a plan
as of
the company’s fiscal year-end, with limited exceptions, and expands
financial statement disclosures. The Company adopted all
requirements of SFAS No. 158 with respect to its international defined
benefit pension plan on December 31, 2006, except for the funded
status
measurement date requirement which will be adopted on December 31,
2008,
as allowed under SFAS No. 158.
|
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a
framework for the measurement of fair value, and enhances disclosures about
fair
value measurements but does not require any new fair value
measures. SFAS No. 157 is effective for fair value measures already
required or permitted by other standards for fiscal years beginning after
November 15, 2007. The Company is required to adopt SFAS No. 157 on
January 1, 2008. SFAS No. 157 is required to be applied
prospectively, except for certain financial instruments. Any
transition adjustment will be recognized as an adjustment to opening retained
earnings in the year of adoption. The Company is currently evaluating
the impact of adopting SFAS No. 157 on its consolidated results of operations
and financial position.
On
February 15, 2007, the FASB issued SFAS No. 159,
The Fair Value
Option for Financial Assets and Financial Liabilities — Including an Amendment
of FASB Statement No. 115
(“SFAS No.
159”). SFAS No. 159 permits an entity to irrevocably elect to report
selected financial assets and liabilities at fair value, with subsequent changes
in fair value reported in earnings. The election may be applied on an
instrument-by-instrument basis. SFAS No. 159 also establishes
additional presentation and disclosure requirements for items measured using
the
fair value option. SFAS No. 159 is effective for all financial statements
issued for fiscal years beginning after November 15, 2007. The
Company has not yet determined whether it will adopt SFAS No. 159.
|
5.
|
STOCK-BASED
COMPENSATION
|
The
Company follows the provisions of SFAS No. 123(R),
Share-Based Payment,
and related interpretations (collectively, “SFAS No. 123(R)”) to account
for stock-based compensation. SFAS No. 123(R) supersedes Accounting
Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to
Employees
,
and revises guidance in 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
compensation expense be recognized in the financial statements for share-based
awards based on the grant date fair value of those awards. 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 previously required.
Pursuant
to SFAS No. 123(R), the Company recognizes stock-based compensation expense
based on the grant-date fair value of its share-based awards granted subsequent
to December 31, 2005 that are expected to vest. Compensation expense
is recognized on a straight-line basis over the requisite service period, which
is generally commensurate with the vesting term. Compensation expense
is recognized immediately for share-based awards that are fully vested on the
date of the grant. During the three months and nine months ended
September 30, 2007, there were no stock option grants issued and no compensation
expense recognized in the Company’s financial statements related to share-based
awards. For the three months and nine months ended September 30,
2006, compensation expense recognized in the Company’s financial statements
related to share-based awards totaled approximately $19,000. For the
three months and nine months ended September 30, 2007 and 2006, the Company
did
not record any excess tax benefits generated from stock option exercises because
of the Company’s significant net operating loss carryforwards for Federal income
tax purposes.
The
Company uses the Black-Scholes option pricing model to determine the fair value
of the Company’s share-based awards under SFAS No. 123(R), which is the same
valuation technique previously used for pro forma disclosures under SFAS No.
123. 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.
Pursuant
to the Company’s Credit Agreement (see Note 12), the Company is not permitted to
pay any dividends and does not anticipate paying any cash dividends in the
foreseeable future. Therefore, an expected dividend yield of zero is
assumed for purposes of the Company’s Black Scholes
calculations. Pre-vesting forfeiture rates are estimated based on the
Company’s historical experience and expectations about future
forfeitures. Expected price volatility is determined using a weighted
average of daily historical volatility of the Company’s stock price over the
corresponding expected option life. The average risk-free interest
rate is determined using the Federal Reserve nominal rates in effect as of
the
date of grant for U.S. Treasury zero-coupon bonds with maturities similar to
those of the expected term of the share-based award being valued. The
expected term of stock options is determined using historical data.
Stock-Based
Employee Compensation Plans
. At September 30, 2007, the
Company has two stock-based employee compensation plans: the 1992 Stock Option
Plan (the “1992 Plan”) and the 1999 Stock Option Plan (the “1999
Plan”).
The
1992
Plan was adopted on April 28, 1992 and, as amended, authorized the issuance
of
up to 4,800,000 shares of common stock to certain employees, consultants and
directors of the Company under incentive and/or nonqualified options and/or
alternate rights. An alternate right is defined as the right to
receive an amount of cash or shares of stock having an aggregate market value
equal to the appreciation in the market value of a stated number of shares
of
the Company’s common stock from the alternate right grant date to the exercise
date. Options and/or rights under the 1992 Plan were granted through
April 27, 2002 at prices not less than 100 percent of the market value at
the date of grant. Options and/or rights become exercisable based
upon a vesting schedule determined by the 1992 Plan Committee and become fully
exercisable upon a change in control, as defined. Options expire not
more than ten years from the date of grant and alternate rights expire at the
discretion of the 1992 Plan Committee. At September 30, 2007,
currently exercisable options for 719,337 shares were outstanding under the
1992
Plan. There were no alternate rights issued under the 1992
Plan. The expiration of the 1992 Plan on April 27, 2002 does not
affect options currently outstanding.
The
1999
Plan was approved by the shareholders on May 27, 1999, and as amended on May
19,
2004, authorizes the issuance of up to 5,345,000 shares of common stock to
certain employees, consultants and directors of the Company under incentive
and/or nonqualified options, stock appreciation rights (“SARs”) and other stock
awards (collectively, “Stock Awards”). Stock Awards under the 1999
Plan may be granted at prices not less than 100 percent of the market value
at
the date of grant. Options and/or SARs become exercisable based upon
a vesting schedule determined by the 1999 Plan Committee and become fully
exercisable upon a change in control, as defined. Options expire not
more than ten years from the date of grant and SARs and other stock awards
expire at the discretion of the 1999 Plan Committee. The 1999 Plan is
unlimited in duration. At September 30, 2007, currently exercisable
options for 2,856,500 shares were outstanding under the 1999 Plan.
At
September 30, 2007, there were 1,607,100 shares available for future grants
under the Company’s stock option plans.
A
summary
of option activity during the nine months ended September 30, 2007 is as
follows:
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Outstanding
and Exercisable – December 31, 2006
|
|
|
3,990,806
|
|
|
$
|
2.97
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
Exercised
|
|
|
(378,969
|
)
|
|
|
2.49
|
|
|
|
Canceled
|
|
|
(36,000
|
)
|
|
|
4.69
|
|
|
|
Outstanding
and Exercisable – September 30, 2007
|
|
|
3,575,837
|
|
|
$
|
3.01
|
|
The
following table summarizes information pertaining to options outstanding and
exercisable at September 30, 2007:
|
|
Range
of
Exercise
Prices
|
Number
Outstanding
and Exercisable
|
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
$0.72
- $1.50
|
350,011
|
3.4
|
|
$ 1.39
|
|
|
|
$1.66
- $2.28
|
1,272,581
|
3.8
|
|
1.96
|
|
|
|
$2.35
- $3.59
|
431,745
|
4.6
|
|
3.01
|
|
|
|
$3.60
- $3.99
|
748,000
|
6.6
|
|
3.72
|
|
|
|
$4.00
- $5.02
|
773,500
|
6.1
|
|
4.77
|
|
|
|
|
3,575,837
|
4.9
|
|
$ 3.01
|
|
The
aggregate intrinsic value of options outstanding and exercisable was
approximately $18.1 million at September 30, 2007. There were 153,500
options and 378,969 options exercised during the three months and nine months
ended September 30, 2007, respectively. There were no options
exercised during the three months ended September 30, 2006 and 60,750 options
exercised during the nine months ended September 30, 2006. The total
intrinsic value of options exercised during the three months and nine months
ended September 30, 2007 was approximately $582,000 and $1.0 million,
respectively, and $152,000 for the nine months ended September 30, 2006, as
determined as of the date of exercise. Cash received from option
exercises totaled $363,000 and $946,000 during the three months and nine months
ended September 30, 2007, respectively, and $68,000 during the nine months
ended
September 30, 2006.
Employee
Stock Purchase Plan
. In March 1999, the Company adopted
an Employee Stock Purchase Plan (the “1999 ESPP”) which authorized the issuance
of up to 700,000 shares of common stock. At December 31, 2006, there
were 104,633 shares available for future issuance under the 1999
ESPP. In May 2007, the Company’s shareholders approved the 2007
Employee Stock Purchase Plan (the “2007 ESPP”) which authorizes the issuance of
up to 500,000 shares of common stock, plus the 104,633 shares available for
purchase under the 1999 ESPP. Under the 2007 ESPP, eligible employees
may contribute up to ten percent of their compensation toward the purchase
of
common stock at each year-end. The employee purchase price is derived
from a formula based on fair market value of the Company’s common
stock. Compensation cost associated with the rights granted under the
2007 ESPP is estimated based on fair market value. At September 30,
2007, there were 604,633 shares available for future issuance under the 2007
ESPP.
|
6.
|
STOCK
REPURCHASE PROGRAM
|
In
August
2006, the Board of Directors amended the Company’s existing stock repurchase
program to authorize the repurchase of an aggregate of 4.0 million shares over
an indefinite period, including approximately 1.7 million shares previously
repurchased under the program. During the nine months ended September
30, 2007, the Company repurchased 141,100 shares under this program for
approximately $627,000, at an average repurchase price of approximately $4.44
per share. There were no repurchases under this program during the
three months ended September 30, 2007. During the three months and
nine months ended September 30, 2006, the Company repurchased 315,000 shares
and
550,241 shares, respectively, under this program for approximately $1.1 million
and $2.0 million, respectively, an average repurchase price of approximately
$3.55 per share and $3.64 per share, respectively. As of September
30, 2007, the Company had repurchased approximately 2.1 million shares for
an
aggregate repurchase price of approximately $5.6 million.
Each
of
the following described 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 consolidated
financial statements from their respective acquisition date.
Effective
March 1, 2006, Microtek acquired KMMS Holdings, Ltd. and its European
manufacturing and distribution operations (collectively, “Samco”) for
approximately $2.3 million in cash, including acquisition costs. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their respective estimated fair values as follows (in
thousands):
|
|
Purchase
consideration in cash
|
|
|
|
|
$
|
2,256
|
|
|
|
Allocated
to:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
347
|
|
|
|
|
|
|
|
Inventories
|
|
|
787
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
273
|
|
|
|
|
|
|
|
Identifiable
intangible assets
|
|
|
739
|
|
|
|
|
|
|
|
Accounts
payable and other accrued liabilities
|
|
|
(628
|
)
|
|
|
|
|
|
|
Total
allocation
|
|
|
|
|
|
|
1,518
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
738
|
|
Identifiable
intangible assets related to the Samco acquisition include customer lists of
approximately $429,000 (useful life of approximately nine years), a non-compete
agreement of $155,000 (useful life of five years), trade name of $52,000 (useful
life of 15 years) and other intangible assets of approximately $103,000 (useful
life of five years).
Effective
July 1, 2006, Microtek acquired substantially all of the assets of Ceres
Medical, LLC (Ceres Medical), a marketer of a small line of products sold
primarily to cardiology and interventional radiology specialties, for
approximately $492,000 in cash. The purchase price allocation was
finalized during the quarter ended June 30, 2007, and based on the estimated
fair values of the assets acquired and liabilities assumed, is as follows (in
thousands):
|
|
Purchase
consideration in cash
|
|
|
|
|
$
|
492
|
|
|
|
Allocated
to:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
46
|
|
|
|
|
|
|
|
Inventories
|
|
|
46
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
6
|
|
|
|
|
|
|
|
Identifiable
intangible assets
|
|
|
176
|
|
|
|
|
|
|
|
Accounts
payable and other accrued liabilities
|
|
|
(47
|
)
|
|
|
|
|
|
|
Total
allocation
|
|
|
|
|
|
|
227
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
265
|
|
Identifiable
intangible assets related to the Ceres Medical acquisition include customer
lists of $72,000 (useful life of five years) and a non-compete agreement for
$104,000 (useful life of five years). The terms of the related
purchase agreement also provide for additional cash consideration up to $550,000
if future contribution margins from the acquired product line exceed certain
levels, as defined in the agreement, through 2011. The additional
consideration will be recorded when it is determinable that the payment of
such
amounts is probable and is expected to result in additional
goodwill.
Microtek
acquired all of the stock of Europlak, a surgeon-owned marketer of minimally
invasive surgical products and devices primarily in urology, gastroenterology
and related surgical specialties on October 2, 2006. Europlak is
located in France and currently generates substantially all of its revenues
from
French customers. The purchase price allocation was finalized during
the quarter ended September 30, 2007, and based on the estimated fair values
of
the assets acquired and liabilities assumed, is as follows (in
thousands):
|
|
Purchase
consideration in cash
|
|
|
|
|
$
|
6,817
|
|
|
|
Allocated
to:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
1,020
|
|
|
|
|
|
|
|
Inventories
|
|
|
575
|
|
|
|
|
|
|
|
Prepaid
expenses and other assets
|
|
|
145
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
427
|
|
|
|
|
|
|
|
Identifiable
intangible assets
|
|
|
5,596
|
|
|
|
|
|
|
|
Accounts
payable and other accrued liabilities
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
Deferred
tax liability
|
|
|
(273
|
)
|
|
|
|
|
|
|
Bank
overdrafts and other loans payable
|
|
|
(1,591
|
)
|
|
|
|
|
|
|
Total
allocation
|
|
|
|
|
|
|
4,758
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
2,059
|
|
Identifiable
intangible assets related to the Europlak acquisition include patents and
licenses of approximately $3.8 million (average useful life of ten years),
customer lists of $320,000 (useful life of five years), non-compete agreements
of $512,000 (useful life of twenty years) and other intangible assets of
approximately $965 thousand (useful life of ten years). The terms of
the Europlak agreement also provide for additional cash consideration up to
approximately $12.4 million through 2021 if certain revenue hurdles, as defined
in the agreement, are achieved. The additional consideration will be
recorded when it is determinable that the payment of such amounts is probable
and is expected to result in additional goodwill.
On
December 15, 2006, Microtek acquired all of the stock of Eurobiopsy, a company
focused on the design, development, manufacture and commercialization of a
line
of endoscope biopsy forceps. Similar to Europlak, Eurobiopsy is
located in France and currently generates substantially all of its revenues
from
French customers. The purchase price of approximately $140 thousand
in cash, including certain acquisition costs, is expected to be allocated to
the
assets acquired and liabilities assumed, primarily accounts receivable,
inventories, identifiable intangibles, accounts payable, other accrued
liabilities and notes payable, based on the respective estimated fair values
of
those assets and liabilities, with the excess allocated to
goodwill.
The
Company is currently evaluating the fair value of the assets acquired in the
Eurobiopsy acquisition, principally other identifiable intangible assets and
goodwill. The preliminary allocation of the total purchase price for
this acquisition is subject to revision in 2007 based on the final determination
of these fair values.
The
following unaudited pro forma financial information for the three months and
nine months ended September 30, 2007 and 2006 reflect the Company’s results of
operations as if these acquisitions had been completed on January 1, 2006 (in
thousands, except per share data):
|
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Net
revenues
|
|
$
|
39,222
|
|
|
$
|
36,789
|
|
|
$
|
114,903
|
|
|
$
|
110,718
|
|
|
|
Net
income
|
|
$
|
2,484
|
|
|
$
|
1,712
|
|
|
$
|
7,074
|
|
|
$
|
6,311
|
|
|
|
Net
income per share – basic
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
|
|
Net
income per share – diluted
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
The
pro
forma financial information above 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
if the Samco, Ceres Medical, Europlak and Eurobiopsy acquisitions had been
consummated as of the dates 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 received license royalties equal to $75,000 per quarter
through September 30, 2007. Thereafter and generally until the
expiration of the underlying patents related to the products or services
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. In September 2004, the Company also entered into an
exclusive three-year supply agreement (the “Supply Agreement”) under which the
Company agreed to provide certain sourcing and supply chain management services
to ETI, and ETI agreed to purchase a total of approximately $4.8 million of
inventory over the term of the Supply Agreement. For these services,
the Company received management fees totaling $2.7 million, $600,000 of which
was received at the signing of the Supply Agreement and the remainder of which
was paid in quarterly installments of $175,000 beginning December 31, 2004
and
ending 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 subsequent management fees
collected from ETI, was recognized into income ratably over the term of the
Supply Agreement as nuclear finished goods inventories on hand were sold to
ETI. During the first quarter of 2007, the nuclear finished goods
inventories were fully depleted, and the Company had fulfilled all of its
responsibilities to ETI under the Supply Agreement. At December 31,
2006, amounts recognized into income exceeded cash receipts from ETI by
approximately $294,000, which amount was recorded in the accompanying unaudited
condensed consolidated balance sheet in prepaid expenses and other current
assets.
|
9.
|
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 10 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, including interest at 5%, was
repaid ratably as the raw material inventories purchased by GRI in the
transaction were consumed by GRI. The final note payment was received
in August 2006. 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 recognized into income as the raw material inventories
purchased by GRI in the transaction were sold by GRI. During the
three months and nine months ended September 30, 2006, approximately $11,000
and
$13,000, respectively, of this deferred gain was recognized into
income. At September 30, 2006, all remaining deferred gain on this
transaction had been fully recognized into income.
|
10.
|
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 $945,000 and $751,000 at September 30, 2007 and December 31,
2006,
respectively. The Company recorded $61,000 and $194,000 of income
during the three months and nine months ended September 30, 2007, respectively,
and $80,000 and $203,000 of income during the three months and nine months
ended
September 30, 2006, respectively, related to this investment.
Inventories
are stated at the lower of cost or market. The first-in first-out
(“FIFO”) 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
September 30, 2007 and December 31, 2006 as follows (in thousands):
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Raw
materials
|
|
$
|
14,193
|
|
|
$
|
13,317
|
|
|
|
Work-in-progress
|
|
|
1,407
|
|
|
|
1,397
|
|
|
|
Finished
goods
|
|
|
23,718
|
|
|
|
20,940
|
|
|
|
Total
inventories
|
|
$
|
39,318
|
|
|
$
|
35,654
|
|
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 $23.5 million revolving credit facility, which matures
on June 30, 2008. Borrowing availability under the revolving credit
facility is based on the lesser of (i) a percentage of eligible accounts
receivable and inventory or (ii) $23.5 million, less any outstanding letters
of
credit issued under the Credit Agreement. Revolving credit borrowings
bear interest at a floating rate approximating the Bank’s prime rate plus an
interest margin (8.5% at September 30, 2007). Borrowing availability
under the revolving facility at September 30, 2007 and December 31, 2006 totaled
$19.9 million and $17.4 million, respectively. There were no
outstanding borrowings under the revolving credit facility as of September
30,
2007 or December 31, 2006. 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, and places limitations on acquisitions,
dispositions, capital expenditures and additional indebtedness. In
addition, the Company is not permitted to pay any dividends. At
September 30, 2007 and December 31, 2006, the Company was in compliance with
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 September 30,
2007 or December 31, 2006. The Credit Agreement also provides for a
fee of 0.3% 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 a long-term lease
arrangement which totaled $8,000 and $19,000 at September 30, 2007 and December
31, 2006, respectively. In addition, as a result of the Company’s
Europlak and Eurobiopsy acquisitions in October and December 2006, respectively,
the Company assumed two notes payable to banks with amounts outstanding at
September 30, 2007 of approximately $802,000 and $0, respectively, and $836,000
and $39,000, respectively, at December 31, 2006. The first of these
notes payable bears interest at 4.25 percent and is payable in monthly
installments of principal and interest through March 2013. The second
note payable was subject to interest at a floating rate and was repaid in full
in August 2007.
The
carrying value of long-term debt at September 30, 2007 and December 31, 2006
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 with SFAS No. 128,
Earnings Per
Share
, which requires dual presentation of basic and diluted earnings per
share on the face of the income statement for 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
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Basic
Shares
|
|
|
43,535
|
|
|
|
43,434
|
|
|
|
43,463
|
|
|
|
43,581
|
|
|
|
Dilutive
Shares (due to stock options)
|
|
|
1,631
|
|
|
|
997
|
|
|
|
1,121
|
|
|
|
993
|
|
|
|
Diluted
Shares
|
|
|
45,166
|
|
|
|
44,431
|
|
|
|
44,584
|
|
|
|
44,574
|
|
For
the
nine months ended September 30, 2007, options to purchase 250,000 shares 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 antidilutive shares for the three months ended September 30,
2007. For the three months and nine months ended September 30, 2006,
there were approximately 1.6 million antidilutive shares.
|
14.
|
GEOGRAPHIC
CONCENTRATIONS
|
A
significant portion of the Company’s products are manufactured at its facilities
in the Dominican Republic, Mexico, the Netherlands, Malta, France or at GRI’s
facilities in China. Included in the Company’s consolidated balance
sheet at September 30, 2007 and December 31, 2006 are the net assets of the
Company’s sales, manufacturing and distribution facilities located in the United
Kingdom and the Dominican Republic which totaled $19.3 million and $17.5
million, respectively. Additionally, at September 30, 2007 and
December 31, 2006, the net assets of the Company’s sales, manufacturing and
distribution operations in the Netherlands, Malta, Germany and France totaled
$33.6 million and $28.4 million, respectively. The Company’s
Dominican Republic and Mexico facilities are engaged in manufacturing operations
only and do not sell products to external customers.
Total
international sales by the Company were $10.9 million and $31.7 million for
the
three and nine months ended September 30, 2007, respectively, and $8.9 million
and $27.4 million for the three months and nine months ended September 30,
2006,
respectively.
The
Company’s operations are subject to various political, economic and other risks
and uncertainties inherent in the countries in which the Company
operates. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations.
|
15.
|
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 conducts substantially all of its operations through its subsidiary,
Microtek Medical, Inc. (“Microtek”). OREX Technologies International
(“OTI”), a division of the Company, was previously focused on the
commercialization of the Company's OREX degradable products and disposal
technologies to the nuclear power generating industry until this business was
licensed to a third party in September 2004.
Microtek,
a market leading healthcare company within its area of focus, manufactures
and
sells infection control products, fluid control products, safety products and
other surgical products to healthcare professionals for use in environments
such
as operating rooms and ambulatory surgical centers. Traditionally a
category leader in disposable equipment drapes, specialty patient drapes and
fluid control drapes, Microtek offers a diverse product line which has been
designed to improve patient care and to address risk reduction and cross
contamination concerns for virtually every medical specialty in a healthcare
facility, from interventional radiology, cardiology and angiography to
orthopedics, neurology, OB/GYN, urology and other clinical
environments. Additionally, Microtek is also a prominent contract
manufacturer for some of the most technologically advanced healthcare equipment
companies in the world.
Microtek
has established a broad product selling system through multiple channels
including distributors, directly through its own sales force, original equipment
manufacturers, and private label customers. Additionally, Microtek
has a strong presence as a branded component supplier to custom procedure tray
companies.
Through
its acquisition of certain businesses of International Medical Products, B.V.
and affiliates (collectively, “IMP”) on May 28, 2004, Microtek added to its
operations the development, manufacture, marketing and distribution in Europe
of
high quality dip-molded medical devices (primarily ultrasound probe covers),
other equipment covers, cardiac thoracic drain systems, gynecological devices
and wound care products. Microtek’s acquisition in March 2006 of the
European manufacturing and distribution operations of Samco added additional
European manufacturing capacity, primarily in Malta, and an expanded sales
presence in Germany. In July 2006, Microtek acquired substantially
all of the assets of Ceres Medical, a marketer of a small line of products
sold
primarily to cardiology and interventional radiology specialties within the
U.S. In October 2006, Microtek acquired all of the stock of Europlak,
a marketer of minimally invasive surgical products and devices primarily to
urology, gastroenterology and related surgical specialties. In
December 2006, Microtek acquired all of the stock of Eurobiopsy, a company
focused on the design, development, manufacture and commercialization of a
line
of endoscope biopsy forceps.
In
September 2004, the Company entered into an agreement (the “License Agreement”)
with Eastern Technologies, Inc. (“ETI”) which grants to ETI a worldwide
exclusive license to manufacture, use and sell the Company’s OREX materials and
processing technology in the nuclear industry and the homeland security industry
and for certain other industrial applications. Concurrent with the
signing of the License Agreement, the Company also entered into an exclusive
three-year supply agreement (the “Supply Agreement”) under which the Company
agreed to provide certain sourcing and supply chain management services and
to
sell a total of approximately $4.8 million of inventory to ETI over the term
of
the Supply Agreement. The Company’s responsibilities to ETI under the
Supply Agreement were fulfilled during the first quarter of
2007. Except for activities under the License Agreement, the Company
is not actively engaged in any business development efforts associated with
the
Company’s OREX products and processing technologies.
The
Company provides healthcare professionals with innovative product solutions
that
encompass a high level of patient care and prevention of cross
infection. The Company intends to maintain this business by
continually improving its existing capabilities and simultaneously developing
and acquiring new business opportunities while maintaining its customer focus
and providing the highest levels of customer support. The Company
seeks to increase sales and earnings from its infection control business by
completing strategic acquisitions, enhancing marketing and distribution efforts
both domestically and internationally, introducing new products, increasing
direct sales representation, employing tele-sales agents for added sales
coverage, and capitalizing on low-cost manufacturing opportunities in the
Dominican Republic, Malta and China.
Pending
Acquisition
On
August
7, 2007, the Company and Ecolab entered into a definitive agreement and plan
of
merger whereby Ecolab will acquire the Company in a cash
transaction. Under the terms of the agreement, the Company’s
shareholders will receive $6.30 for each share of common stock outstanding
as of
the closing date of the transaction, which is expected to occur as soon as
practicable following the Company’s meeting of shareholders scheduled for
November 9, 2007, subject to obtaining the required approval of shareholders
at
that meeting. Completion of the transaction is contingent upon
various conditions, which are more fully set forth in the merger agreement,
including, among other things, approval of the transaction by the Company’s
shareholders and other customary closing conditions.
Results
of Operations
The
following tables set forth certain unaudited income statement data, including
amounts expressed as a percentage of net revenues, for the three months and
nine
months ended September 30, 2007 and 2006 (in thousands):
|
|
|
|
Three
months ended
September
30, 2007
|
|
|
Three
months ended
September
30, 2006
|
|
|
|
|
|
Amount
($)
|
|
|
%
of Net Revenues
|
|
|
Amount
($)
|
|
|
%
of Net Revenues
|
|
|
|
Net
revenues
|
|
$
|
39,222
|
|
|
|
100.0
|
%
|
|
$
|
35,108
|
|
|
|
100.0
|
%
|
|
|
Gross
profit
|
|
|
16,341
|
|
|
|
41.7
|
%
|
|
|
13,740
|
|
|
|
39.1
|
%
|
|
|
Operating
expenses
|
|
|
12,830
|
|
|
|
32.7
|
%
|
|
|
11,195
|
|
|
|
31.9
|
%
|
|
|
Income
from operations
|
|
|
3,511
|
|
|
|
9.0
|
%
|
|
|
2,545
|
|
|
|
7.2
|
%
|
|
|
Net
income
|
|
|
2,484
|
|
|
|
6.3
|
%
|
|
|
1,648
|
|
|
|
4.7
|
%
|
|
|
|
|
Nine
months ended
September
30, 2007
|
|
|
Nine
months ended
September
30, 2006
|
|
|
|
|
|
Amount
($)
|
|
|
%
of Net Revenues
|
|
|
Amount
($)
|
|
|
%
of Net Revenues
|
|
|
|
Net
revenues
|
|
$
|
114,903
|
|
|
|
100.0
|
%
|
|
$
|
104,849
|
|
|
|
100.0
|
%
|
|
|
Gross
profit
|
|
|
48,202
|
|
|
|
42.0
|
%
|
|
|
41,450
|
|
|
|
39.5
|
%
|
|
|
Operating
expenses
|
|
|
38,606
|
|
|
|
33.6
|
%
|
|
|
32,494
|
|
|
|
31.0
|
%
|
|
|
Income
from operations
|
|
|
9,596
|
|
|
|
8.4
|
%
|
|
|
8,956
|
|
|
|
8.5
|
%
|
|
|
Net
income
|
|
|
7,074
|
|
|
|
6.2
|
%
|
|
|
6,053
|
|
|
|
5.8
|
%
|
Three
Months and Nine Months Ended September 30, 2007 Compared to Three Months and
Nine Months Ended September 30, 2006
Net
Revenues.
Consolidated net revenues for the three months and
nine months ended September 30, 2007 (the “2007 Quarter” and the “2007 Period”,
respectively) of $39.2 million and $114.9 million, respectively, increased
by
approximately $4.1 million, or 11.7 percent, and $10.1 million, or 9.6 percent,
over consolidated net revenues of $35.1 million reported for the three months
ended September 30, 2006 (the “2006 Quarter”) and $104.8 million reported for
the nine months ended September 30, 2006 (the “2006 Period”).
For
the
2007 Quarter and 2007 Period, Microtek’s net revenues of $39.1 million and
$114.1 million, respectively, increased $4.4 million, or 12.9 percent, and
$10.3
million, or 9.9 percent, respectively, from $34.7 million and $103.8 million
reported for the respective 2006 quarter and year-to-date periods.
The
following tables depict Microtek’s domestic and international revenues and the
relative percentage of each to Microtek’s total revenues for the 2007 Quarter
and 2006 Quarter and for the 2007 Period and 2006 Period (in
millions):
|
|
|
|
Three
months ended
September
30, 2007
|
|
|
Three
months ended
September
30, 2006
|
|
|
|
|
|
Amount
|
|
|
%
of Total
|
|
|
Amount
|
|
|
%
of Total
|
|
|
|
Domestic
|
|
$
|
28.2
|
|
|
|
72.1
|
%
|
|
$
|
25.8
|
|
|
|
74.4
|
%
|
|
|
International
|
|
|
10.9
|
|
|
|
27.9
|
%
|
|
|
8.9
|
|
|
|
25.6
|
%
|
|
|
Total
|
|
$
|
39.1
|
|
|
|
100.0
|
%
|
|
$
|
34.7
|
|
|
|
100.0
|
%
|
|
|
|
|
Nine
months ended
September
30, 2007
|
|
|
Nine
months ended
September
30, 2006
|
|
|
|
|
|
Amount
|
|
|
%
of Total
|
|
|
Amount
|
|
|
%
of Total
|
|
|
|
Domestic
|
|
$
|
82.4
|
|
|
|
72.2
|
%
|
|
$
|
76.4
|
|
|
|
73.6
|
%
|
|
|
International
|
|
|
31.7
|
|
|
|
27.8
|
%
|
|
|
27.4
|
|
|
|
26.4
|
%
|
|
|
Total
|
|
$
|
114.1
|
|
|
|
100.0
|
%
|
|
$
|
103.8
|
|
|
|
100.0
|
%
|
Microtek’s
domestic revenues are generated through two primary channels or customer
categories: domestic branded and contract manufacturing (commonly referred
to as
OEM). Included in the Company’s OEM revenues are sales of products to
“non-branded” or private label customers. Domestic branded revenues
were 65.6 percent of total domestic revenues in the 2007 Quarter, as compared
to
68.3 percent in the 2006 Quarter. OEM revenues were 34.4 percent and
31.7 percent of total domestic revenues in the 2007 Quarter and 2006 Quarter,
respectively. For the 2007 Period, domestic branded revenues were
67.4 percent of total domestic revenues, as compared to 65.3 percent for the
2006 Period. OEM revenues were 32.6 percent and 34.7 percent of total
domestic revenues in the 2007 Period and 2006 Period, respectively.
Domestic
branded revenues in the 2007 Quarter and 2007 Period increased over the 2006
Quarter and 2006 Period by $913 thousand, or 5.2 percent, and $5.6 million,
or
11.3 percent, respectively. The primary contributors to the improved
domestic branded revenues in the 2007 Quarter were the Company’s core equipment
draping revenues which grew $524 thousand, or 7.1 percent, and the Company’s
specialty product revenues (including Microtek’s CleanOp product sales and its
specialty procedure patient drapes) which grew $435 thousand, or 4.5 percent,
as
compared to the 2006 Quarter. Additionally, the Company’s surgical
product offerings in orthopedics and cardiology increased by approximately
$163
thousand during the 2007 Quarter. For the 2007 Period, specialty
product revenues increased by $3.4 million, or 12.6 percent; core equipment
draping revenues grew by $1.9 million, or 8.9 percent; and orthopedic and
cardiology revenues increased by approximately $602 thousand (primarily as
a
result of the Ceres Medical acquisition in July 2006), as compared to the 2006
Period.
For
the
2007 Quarter, OEM revenues increased by $1.5 million, or 18.7 percent, primarily
as a result of a $1.6 million, or 27.7 percent, increase in contract
manufacturing revenues as compared to the 2006 Quarter. For the 2007
Period, OEM revenues increased by $347 thousand, or 1.3 percent, over the 2006
Period as a 4.0 percent increase in contract manufacturing revenues was offset
by lower woundcare and triad product revenues. OEM revenues can be
volatile as they are heavily dependent on customer demand and the buying
patterns of the Company’s OEM partners. In 2006, the Company began
strategically evaluating its OEM business to diversify its customer base and
improve the overall profitability of its OEM accounts. Business was
curtailed where targeted profitability levels were not being met. The
Company also began pursuing new OEM customers with a targeted marketing
campaign focused on the Company's global OEM capabilities. As a
result of this process, the Company believes it lessened its dependence on
a few
large customers, secured more profitable, higher technological OEM opportunities
and broadened its OEM customer base.
Overall,
Microtek’s total domestic revenues in the 2007 Quarter and 2007 Period increased
by approximately $2.4 million, or 9.5 percent, and $6.0 million, or 7.8 percent,
over the 2006 Quarter and 2006 Period, respectively.
Microtek’s
international net revenues for the 2007 Quarter increased by $2.0 million,
or
22.7 percent, to $10.9 million as compared to the 2006 Quarter. This
revenue improvement was driven primarily by an increase of approximately $874
thousand, or 21.5 percent, in the Company’s Netherlands-based revenues, which
includes its businesses in Malta and Germany, and an increase of $589 thousand,
or 12.2 percent, in the Company’s United Kingdom and other international
revenues. Additionally, approximately $553 thousand of the
quarter-over-quarter revenue increase is attributable to the Europlak and
Eurobiopsy businesses which were acquired in October 2006 and December 2006,
respectively. Microtek’s international net revenues for the 2007
Period totaled $31.7 million, an increase of approximately $4.3 million, or
15.7
percent, over the 2006 Period. This increase resulted from a
relatively equal measure of organic growth in the Company’s international
businesses (approximately $2.2 million) and revenues related to the acquisition
of the Company’s Europlak and Eurobiopsy businesses (approximately $2.1
million. The Company believes that its international markets continue
to represent key areas for future growth.
OTI’s
net
revenues, consisting primarily of sales of finished goods inventories to ETI
and
royalties under the license agreement of $75 thousand per quarter, totaled
$75
thousand and $776 thousand in the 2007 Quarter and 2007 Period, respectively,
as
compared to $421 thousand in the 2006 Quarter and $1.0 million in the 2006
Period. As of March 31, 2007, the Company’s OTI finished goods
inventories were fully depleted. Pursuant to the Company’s September
2004 licensing agreement with ETI, the Company expects that the OTI division’s
future revenues will include license royalties equal to the greater of: (i)
generally 5% of ETI’s net sales, as defined in the agreement, or (ii) $300,000
per year.
Gross
Margin.
The Company’s gross profit was $16.3 million, or
41.7 percent of net revenues, in the 2007 Quarter, as compared to $13.7 million,
or 39.1 percent of net revenues, for the 2006 Quarter. For the 2007
Period, the Company’s gross profit was $48.2 million, or 42.0 percent of net
revenues, versus $41.5 million, or 39.5 percent of net revenues for the 2006
Period. The Company attributes the improvement in its gross margins
in the 2007 Quarter and 2007 Period to favorable changes in the Company’s sales
mix, particularly the increase in the Company’s higher margin domestic branded
revenues relative to its OEM revenues in the 2007 Period as compared to the
2006
Period, leverage from additional sales volume, contribution from certain higher
margin international product lines acquired in 2006, recent domestic branded
pricing programs and successful manufacturing cost
initiatives. Additionally, gross margin improvement in the 2007
Quarter and 2007 Period was realized through favorable product and customer
sales mix changes within the domestic branded and OEM channels, primarily strong
core equipment draping revenue growth in the domestic branded business and
successful OEM business rationalization and profitability improvement
initiatives.
Operating
Expenses.
Operating expenses for the 2007 Quarter of $12.8
million represented 32.7 percent of net revenues, as compared to operating
expenses of $11.2 million, or 31.9 percent of net revenues, in the 2006
Quarter. For the 2007 Period, operating expenses totaled $38.6
million, or 33.6 percent of net revenues, as compared to $32.5 million, or
31.0
percent of net revenues in the 2006 Period.
Selling,
general and administrative (“SG&A”) expenses in the 2007 Quarter and 2007
Period were $12.0 million and $36.4 million, respectively, as compared to $10.8
million in the 2006 Quarter and $31.3 million in the 2006 Period. As
a percentage of net revenues, the Company’s SG&A expenses in the 2007
Quarter and 2007 Period were 30.7 percent and 31.7 percent, respectively, versus
30.7 percent of net revenues in the 2006 Quarter and 29.9 percent of net
revenues in the 2006 Period.
For
the
2007 Quarter and 2007 Period, domestic SG&A expenses increased by
approximately $519 thousand and $2.6 million, respectively, over the 2006
Quarter and 2006 Period. For the 2007 Quarter, domestic sales and
marketing expenses decreased by $226 thousand primarily due to favorable results
of changes in the Company’s incentive-based compensation arrangements offset
slightly by higher advertising, sales promotion and travel expenses in the
2007
Quarter as compared to the 2006 Quarter. For the 2007 Period,
domestic sales and marketing expenses increased by $571 thousand over the 2006
Period as a result of higher salaries and benefits, a significant portion of
which are variable in relation to domestic branded sales volumes, direct hiring
and training expenses for new sales personnel, sales fees and travel and related
expenses. Domestic distribution expenses, which consist primarily of
variable distribution freight, increased by $174 thousand and $471 thousand
in
the 2007 Quarter and 2007 Period, respectively. Domestic general and
administrative expenses increased by $571 thousand and $1.6 million in the
2007
Quarter and 2007 Period, respectively, as a result of normal inflationary
increases in general and administrative salaries and benefits and higher
professional fees related primarily to the proposed merger transaction with
Ecolab.
For
the
2007 Quarter and 2007 Period, SG&A expenses of the Company’s international
operations based in the Netherlands, Malta, Germany and France increased
approximately $740 thousand and $2.5 million, respectively. Included
in these increases for the 2007 Quarter and 2007 Period are incremental SG&A
expenses related to the October 2006 Europlak acquisition and the December
2006
Eurobiopsy acquisition of approximately $737 thousand and $2.3 million,
respectively. Excluding Europlak and Eurobiopsy, international
SG&A expenses in the 2007 Quarter were consistent with the 2006 Quarter and
for the 2007 Period increased by approximately $126 thousand primarily as a
result of additional investments in the Company’s sales, marketing and
administrative infrastructure in the Netherlands.
Research
and development expenses of $396 thousand and $1.1 million for the 2007 Quarter
and 2007 Period, respectively, increased from $159 thousand in the 2006 Quarter
and $448 thousand in the 2006 Period primarily as a result of the Company’s
research and development activities related to Europlak which was acquired
in
the fourth quarter of 2006 and to Microtek’s ongoing research and development
efforts which center on new product development, as well as product enhancements
and product line extensions.
Amortization
of intangibles in the 2007 Quarter and 2007 Period was $393 thousand and $1.1
million, respectively, up from $254 thousand in the 2006 Quarter and $722
thousand in the 2006 Period. The increases in amortization expense in
the 2007 Quarter and 2007 Period are associated primarily with intangibles
acquired in the Samco, Ceres Medical, Europlak and Eurobiopsy transactions
completed in 2006.
Income
from Operations.
Income from operations for the 2007 Quarter
and 2007 Period was $3.5 million, or 9.0 percent of net revenues, and $9.6
million, or 8.4 percent of net revenues, respectively. For the 2006
Quarter and 2006 Period, income from operations was $2.5 million, or 7.2 percent
of net revenues, and $9.0 million, or 8.5 percent of net revenues,
respectively.
Interest
Expense and Interest Income.
Interest expense for the 2007
Quarter and 2007 Period of $77 thousand and $146 thousand, respectively,
increased from $16 thousand in the 2006 Quarter and $37 thousand in the 2006
Period primarily as a result of interest expense related to long-term debt
acquired in the Europlak and Eurobiopsy acquisitions in the fourth quarter
of
2006. Interest income in the 2007 Quarter totaled $128 thousand, as
compared to $129 thousand for the 2006 Quarter. For the 2007 Period,
interest income totaled $359 thousand, an increase over interest income for
the
2006 Period of $328 thousand primarily as a result of higher average cash and
cash equivalent balances in the 2007 Period.
Other
Income/Expense, Net.
Other income and expense include the
Company’s equity in earnings of its investee, GRI, and foreign currency exchange
gains resulting from the translation of certain intercompany transactions of
the
Company’s Netherlands subsidiaries which are denominated in a currency other
than the functional currency of those subsidiaries. The Company
recorded foreign currency exchange gains of approximately $593 thousand in
the
2007 Quarter and $796 thousand in the 2007 Period. There were no such
foreign currency exchange gains recorded in the 2006 Quarter or 2006
Period. In the 2007 Quarter and 2007 Period, the Company’s equity in
earnings of its investee, GRI, were $61 thousand and $194 thousand,
respectively, as compared to $80 thousand in the 2006 Quarter and $203 thousand
in the 2006 Period.
Income
Taxes.
The Company’s provisions for income taxes in the 2007
Quarter and 2007 Period reflect income tax expense of $1.7 million and $3.7
million, respectively, consisting of current and deferred Federal, state and
foreign income tax expense. For the 2006 Quarter and 2006 Period, the
Company recorded income tax expense of $1.1 million and $3.4 million,
respectively.
Net
Income.
The resulting net income for the 2007 Quarter and
2007 Period was $2.5 million, or $0.06 per diluted share, and $7.1 million,
or
$0.16 per diluted share, respectively, as compared to $1.6 million, or $0.04
per
diluted share in the 2006 Quarter and $6.1 million, or $0.14 per diluted share
in the 2006 Period.
Liquidity
and Capital Resources
As
of
September 30, 2007 and December 31, 2006, the Company’s cash and cash
equivalents totaled $19.0 million and $17.1 million,
respectively. The Company’s cash flow activity in the 2007 Period and
2006 Period was as follows (in thousands):
|
|
|
|
Nine
months ended September 30,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Cash
provided by operating activities
|
|
$
|
7,815
|
|
|
$
|
8,316
|
|
|
|
Cash
used in investing activities
|
|
|
(1,418
|
)
|
|
|
(4,027
|
)
|
|
|
Cash
used in financing activities
|
|
|
(3,761
|
)
|
|
|
(3,954
|
)
|
The
Company’s principal sources of liquidity have been net cash from operating
activities and borrowings under the Company’s Credit Agreement. The
Company’s liquidity requirements arise primarily from the funding of the
Company’s working capital needs, obligations incurred in connection with
acquisitions of businesses and capital investment in property and
equipment.
During
the 2007 Period, the Company’s operating activities generated cash of
approximately $7.8 million as a result of net income from operations, net of
deferred income taxes, depreciation and amortization, of $12.8 million and
a
$2.4 million increase in accounts payable, offset by other working capital
management requirements, including an increase in receivables and inventory
of
$2.6 million and $3.4 million, respectively, an increase in other current and
long term assets of $1.1 million, and a decrease in accrued expenses and other
liabilities of $396 thousand. The Company’s receivables and inventory
have increased as a result of the Company’s expanding operations and, with
respect to inventories, the impact of certain purchasing strategies to ensure
a
continuous supply of certain inventory items as the Company seeks to transfer
additional manufacturing processes offshore to the Dominican Republic and to
China.
During
the 2006 Period, the Company’s operating activities generated cash of
approximately $8.3 million and consisted primarily of net income from
operations, net of deferred income taxes, depreciation and amortization, of
$11.4 million, an increase in accounts payable of $732 thousand, an increase
in
accrued compensation of $1.5 million, an increase in other liabilities of $173
thousand and a decrease in prepaid expenses and other assets of $494
thousand. Offsetting these sources of cash were a $947 thousand
increase in accounts receivable, net of allowances, and an increase of $4.8
million in inventories.
Cash
used
in investing activities in the 2007 Period totaled $1.4 million as a result
of
additional cash consideration of $96 thousand and $141 thousand paid with
respect to the Europlak and Eurobiopsy acquisitions, respectively, and purchases
of capital property and equipment of $1.2 million and an offsetting $31 thousand
in proceeds from the disposal of property and equipment. Investing
activities in the 2006 Period of $4.0 million included cash consideration of
approximately $2.3 million and $483 thousand for the Samco and Ceres Medical
acquisitions, respectively, purchases of capital property and equipment of
$1.2
million, and proceeds from the disposition of property and equipment of $6
thousand.
During
the 2007 Period, financing activities used approximately $3.8 million in
cash. Financing cash outflows in the 2007 Quarter included a decrease
in the Company’s bank overdraft of approximately $4.7 million, repayments of
long-term debt obligations of $141 thousand, and repurchases of treasury stock
of $627 thousand. Financing cash inflows included proceeds from the
exercise of stock options and other stock issuances of approximately $1.7
million. Cash used in financing activities for the 2006 Period of
$4.0 million included net repayments of borrowings under the Company’s Credit
Agreement of $1.2 million, repayments of other long-term debt agreements of
$343
thousand, a decrease in the Company’s bank overdraft of approximately $1.0
million and repurchase of treasury stock of $2.0 million, offset by $639
thousand from the exercise of stock options and other stock
issuances.
The
Company maintains a $23.5 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, 2008. Borrowing
availability under the revolving credit facility is based on the lesser of
(i) a
percentage of eligible accounts receivable and inventories or (ii) $23.5
million, less any outstanding letters of credit issued under the Credit
Agreement. There were no outstanding borrowings under the revolving
credit facility at September 30, 2007 or December 31, 2006. As of
September 30, 2007, the Company had total borrowing availability under the
revolving facility of $19.9 million. As of November 6, 2007, the
Company had a total borrowing availability of approximately $19.3 million and
no
outstanding borrowings under the facility. Revolving credit
borrowings bear interest at a floating rate approximating the Bank’s prime rate
plus an interest margin (8.5% at November 6, 2007). At September 30,
2007, the Company was in compliance with its financial covenants under the
Credit Agreement.
Based
on
its current business plan, the Company expects that cash and cash equivalents
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 2007 and
subsequent years.
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.
Inflation
Inflation
has not had a material effect on the Company’s operations in the
past. Recently, rising petroleum prices have increased the Company’s
costs of raw materials and distribution expenses included in the Company’s
selling, general and administrative expenses. Where possible, the
Company seeks to pass these increased costs to its customers by increasing
prices, but such efforts may not be successful due to competitive pricing
pressures. The Company seeks to offset these increased costs in part
through cost savings measures in other areas.
Recent
Accounting Pronouncements
Accounting
for Uncertainty in Income Taxes.
In June 2006, the FASB
issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes –
An interpretation of FASB Statement No. 109
(“FIN 48”) which clarifies the
accounting and disclosure requirements for uncertainty in tax positions, as
defined. The Company’s adoption of the provisions of FIN 48 on
January 1, 2007 had no impact on the Company’s consolidated financial
statements. The Company examined its tax positions for all open tax
years through December 31, 2006 and the full benefit of each tax position has
been recognized in the financial statements in accordance with FIN
48. On any future tax positions, the Company intends to record
interest and penalties, if any, as a component of interest expense and general
and administrative expenses, respectively. The Company’s tax years
are open for U.S. Federal purposes from 2004 through 2006. Certain
U.S. state tax years remain open for 2003 and 2006
filings. International statutes vary widely and the open years range
from 2003 through 2006. Taxing authorities have the ability to review
prior tax years to the extent of net operating loss and tax credit carryforwards
to open tax years.
Employer’s
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
In September 2006, the FASB issued SFAS No. 158,
Employer’s Accounting for Defined Benefit Pension and Other Postretirement
Plans– an amendment of FASB Statements No. 87, 88, 106, and 132(R)
(“SFAS
No. 158”). SFAS No. 158 requires companies to recognize the funded
status of defined benefit pension and other postretirement plans as a net asset
or liability in its statement of financial position and to recognize changes
in
that funded status in the year in which the changes occur through comprehensive
income to the extent that those changes are not included in the net periodic
cost. The funded status of a defined benefit pension plan is measured
as the difference between the fair value of plan assets and the projected
benefit obligation under the plan. Additionally, SFAS No. 158
requires companies to measure the funded status of a plan as of the company’s
fiscal year-end, with limited exceptions, and expands financial statement
disclosures. The Company adopted all requirements of SFAS No. 158
with respect to its international defined benefit pension plan as of December
31, 2006, except for the funded status measurement date requirement which will
be adopted on December 31, 2008, as allowed under SFAS No. 158.
Fair
Value Measurement.
In September 2006, the FASB issued SFAS
No. 157,
Fair Value Measurement
(“SFAS No. 157”). SFAS No.
157 defines fair value, establishes a framework for the measurement of fair
value, and enhances disclosures about fair value measurements but does not
require any new fair value measures. SFAS No. 157 is effective for
fair value measure already required or permitted by other standards for fiscal
years beginning after November 15, 2007. The Company is required to
adopt SFAS No. 157 on January 1, 2008. SFAS No. 157 is required to be
applied prospectively, except for certain financial instruments. Any
transition adjustment will be recognized as an adjustment to opening retained
earnings in the year of adoption. The Company is currently evaluating
the impact of adopting SFAS No. 157 on its consolidated results of operations
and financial position.
Fair
Value Option for Financial Assets and Financial
Liabilities.
On February 15, 2007, the FASB issued SFAS
No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of FASB Statement
No. 115
(“SFAS No. 159”). SFAS No. 159
permits an entity to irrevocably elect to report selected financial assets
and
liabilities at fair value, with subsequent changes in fair value reported in
earnings. The election may be applied on an instrument-by-instrument
basis. SFAS No. 159 also establishes additional presentation and
disclosure requirements for items measured using the fair value option.
SFAS No. 159 is effective for all financial statements issued for fiscal
years beginning after November 15, 2007. The Company has not yet
determined whether it will adopt SFAS No. 159.
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, statements regarding the completion and timing of the
proposed transaction with Ecolab; the Company’s ability to grow its business by
continually improving its existing capabilities and simultaneously developing
and acquiring new business opportunities while maintaining its customer focus
and providing the highest levels of customer support; the Company’s ability to
increase sales and earnings from its infection control business by completing
strategic acquisitions, enhancing marketing and distribution efforts both
domestically and internationally, introducing new products, increasing direct
sales representation, employing tele-sales agents for added sales coverage,
and
capitalizing on low-cost manufacturing opportunities in the Dominican Republic,
Malta and China; the Company’s expectation about the composition and amount of
revenues to be received by the Company’s OTI division; and the Company’s current
expectation that cash and cash equivalents on hand, the Company’s existing
credit facility and funds budgeted to be generated from operations will be
adequate to meet its liquidity and capital requirements for the next
year
.
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 on Form 10-K for the year ended December 31, 2006, filed with
the
Securities and Exchange Commission. These risks include, without
limitation, the following: low barriers to entry for competitive
products could cause the Company to reduce the prices for its products or lose
customers; large purchasers of the Company’s products regularly negotiate for
reductions in prices for the Company’s products, which may reduce the Company’s
profits; because a few distributors control much of the delivery of hospital
supplies to hospitals, the Company relies significantly on these distributors
in
connection with the sale of the Company’s branded products; the Company’s
relatively small sales and marketing force may place the Company at a
competitive disadvantage to its competition; the Company’s contract
manufacturing division relies upon a small number of customers, the loss of
any
of which could have a material adverse impact on the Company; the inability
of
the Company to complete acquisitions of businesses at an attractive cost could
adversely affect the Company’s growth; if the Company is successful in acquiring
businesses, the failure to successfully integrate those businesses could
adversely affect the Company; the Company’s growing international operations
subject the Company’s operating results to numerous additional risks; markets in
which the Company competes are highly competitive, which may adversely affect
the Company’s growth and operating results; the Company’s products are subject
to extensive governmental regulations, compliance or non-compliance with which
could adversely affect the Company; the Company’s strategies to protect its
proprietary assets may be ineffective, allowing increased competition with
the
Company; fluctuations in the value of the dollar against foreign currencies
have
in the past and may in the future adversely affect the Company’s operating
results; and the Company’s expenses for raw materials and product distribution
are adversely affected by increases in the price for petroleum
.
The
Company does not undertake to update its 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 foreign currency exchange rates and interest rates.
The
financial position and results of operations of the Company’s foreign
subsidiaries in the United Kingdom, the Netherlands, Malta, Germany and France
are measured using the foreign subsidiary’s local currency as the functional
currency. Revenues and expenses of such subsidiaries are translated
into U.S. dollars at average exchange rates prevailing during the
period. Assets and liabilities are translated at the rates of
exchange on the balance sheet date. The resulting translation gain
and loss adjustments are recorded directly as a separate component of
shareholders’ equity. Foreign currency translation adjustments, net
of applicable taxes, resulted in gains of $709 thousand and $1.1 million for
the
three months and nine months ended September 30, 2007, respectively, and $219
thousand and $1.0 million for the three months and nine months ended September
30, 2006, respectively.
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the subsidiary’s functional currency are
included in the results of operations as incurred. Included in the
Company’s results of operations for three months and nine months ended September
30, 2007 were foreign currency exchange gains of approximately $593 thousand
and
$796 thousand, respectively, resulting from the translation of certain
intercompany transactions of the Netherlands subsidiaries which are denominated
in a currency other than the functional currency of those
subsidiaries. There were no such foreign currency exchange gains or
losses recorded for the three months and six months ended September 30,
2006.
Currency
translations and transactions that are billed and paid in foreign currencies
could be adversely affected in the future by the relationship of the U.S. dollar
and the functional currencies of the Company’s foreign subsidiaries with foreign
currencies.
The
Company is also subject to fluctuations in the value of the Dominican peso
relative to the U.S. dollar. As the value of the Dominican peso
increases with respect to the U.S. dollar, the costs of the Company’s inventory
increase because the Company manufactures a material portion of its inventory
at
its facilities located in the Dominican Republic. The appreciation of
the Dominican peso relative to the U.S. dollar in the future could adversely
affect the Company’s operating results.
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 materially impact interest income accruing on these
investments or, consequently, the Company’s operating results or cash
flow. From time to time, the Company may be impacted by the general
level of U.S. interest rates due to the effect that changes in those rates
have
on the Company's interest expense. At September 30, 2007, the Company
had repaid all of its borrowings under its Credit Agreement which bear interest
at a floating rate approximating the prime rate. Other indebtedness
of the Company at September 30, 2007 which bears interest at a floating rate
was
not material. An increase or decrease in the Company's average
interest rate of ten percent would have had an immaterial impact on the
Company’s recorded interest expense during the three months and nine months
ended September 30, 2007.
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.
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 are effective at the
reasonable assurance level as of the end of the quarter for which
this
report is being filed to ensure that (i) information required to
be
disclosed by the Company in reports that it files or submits 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. The Company has, however, designed its disclosure controls
and procedures to provide, and believes that such controls and procedures do
provide, reasonable assurance that information required to be disclosed by
the
Company in reports that it files or submits 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. The disclosure in this
paragraph about inherent limitations of control systems does not modify the
conclusions set forth in the immediately preceding paragraph of the Company’s
President and Chief Executive Officer and its Chief Financial Officer concerning
the effectiveness of the Company’s disclosure controls and
procedures.
|
(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
1A. Risk Factors
See
the
risk factors described in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006.
Item
2. Unregistered Sales of Equity 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.
Item
3. Default Upon Senior Securities
Not
applicable.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
Not
applicable.
Item
6. Exhibits
|
|
Exhibit
No.
|
Description
|
|
|
|
|
|
|
2.1
(1)
|
Merger
Agreement dated August 7, 2007 among Ecolab Inc., Magic Acquisition
Inc.
and Microtek Medical Holdings, Inc.
|
|
|
|
|
|
|
3.1
(2)
|
Articles
of Incorporation of Isolyser Company,
Inc.
|
|
|
3.3
(3)
|
Amended
and Restated Bylaws of Microtek Medical Holdings, Inc.
|
|
|
|
|
|
|
4.1
(4)
|
Specimen
Certificate of Common Stock
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4.2
(5)
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First
Amended and Restated Shareholder Protection Rights Agreement dated
as of
December 20, 2006 between Microtek Medical Holdings, Inc. and
Computershare Investor Services, LLC
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31.1
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Certification
of Chief Executive Officer
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31.2
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Certification
of Chief Financial Officer
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32.1
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Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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32.2
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Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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(1)
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Incorporated
by reference to Exhibit 2.1 of the Company's Current Report on Form
8-K
dated August 7, 2007.
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(2)
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Incorporated
by reference to Exhibit 3.1 of the Company's Annual Report on Form
10-K
for the year ended December 31, 2004.
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(3)
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Incorporated
by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K
dated October 23, 2007.
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(4)
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Incorporated
by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2006.
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(5)
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Incorporated
by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K
dated December 20, 2006.
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