<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended: May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________.
Commission file number: 0-20346
MICROTEK MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 64-0700671
(State of incorporation) (IRS Employment
Identification No.)
512 LEHMBERG ROAD
COLUMBUS, MISSISSIPPI 39702
(Address of principal executive offices) (Zip Code)
(601) 327-1863
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of July 1, 1996, was 4,680,585 shares.
Page 1 of 15
<PAGE>
MICROTEK MEDICAL, INC.
Index
PART I. FINANCIAL INFORMATION
PAGE NUMBER
-----------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Earnings
Three months ended May 31, 1996 and 1995. . . . . . . . . . . 3
Condensed Consolidated Statements of Earnings
Six months ended May 31, 1996 and 1995. . . . . . . . . . . . 4
Condensed Consolidated Balance Sheets
May 31, 1996 and November 30, 1995. . . . . . . . . . . . . . 5
Condensed Consolidated Statement of Cash Flows
Six months ended May 31, 1996 and 1995. . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . 7
Auditor's Review Report. . . . . . . . . . . . . . . . . . . . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . .12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . .13
Exhibit 15: Letter Re: Unaudited Interim Financial
Information . . . . . . . . . . . . . . . . . . . . . . . . .14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Page 2 of 15
<PAGE>
Microtek Medical, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(In thousands)
Quarter Ended
May 31, May 31,
1996 1995
--------------------------
Net sales $9,970 $7,049
Cost of sales 4,975 3,893
--------------------------
Gross profit 4,995 3,156
Selling, general and administrative
expenses 3,042 2,202
Amortization of goodwill and
other assets 268 74
--------------------------
Total operating expenses 3,310 2,276
--------------------------
Earnings from operations 1,685 880
Interest expense 371 107
--------------------------
Earnings before income taxes 1,314 773
Income taxes 451 325
--------------------------
Net earnings $863 $448
--------------------------
--------------------------
Earnings per common share $0.17 $0.09
--------------------------
--------------------------
Weighted average common shares 5,097 4,925
Page 3 of 15
<PAGE>
Microtek Medical, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(In thousands)
Six months ended
May 31, May 31,
1996 1995
---------------------------
Net sales $19,037 $14,156
Cost of sales 9,690 8,123
---------------------------
Gross profit 9,347 6,033
Selling, general and administrative
expenses 5,588 4,327
Amortization of goodwill and
other assets 533 149
---------------------------
Total operating expenses 6,121 4,476
---------------------------
Earnings from operations 3,226 1,557
Interest expense 687 206
---------------------------
Earnings before income taxes 2,539 1,351
Income taxes 946 567
---------------------------
Net earnings $1,593 $784
---------------------------
---------------------------
Earnings per common share $0.32 $0.16
---------------------------
---------------------------
Weighted average common shares 5,044 4,979
Page 4 of 15
<PAGE>
Microtek Medical, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
May 31, November 30,
Assets 1996 1995
- ------------------------------------------------------------------------------
Current Assets
Cash $566 $308
Accounts receivable-net 7,496 5,592
Inventories
Raw material 3,003 2,261
Work in process 1,776 1,388
Finished goods 8,938 7,218
Deferred income taxes 212 208
Prepaid expenses and other current assets 835 483
---------------------------
Total current assets 22,826 17,457
---------------------------
Property. plant, and equipment 9,639 8,714
Less accumulated depreciation 3,819 3,263
---------------------------
Net property, plant, and equipment 5,820 5,451
---------------------------
Goodwill and other assets 26,399 22,208
---------------------------
$55,045 $45,116
---------------------------
---------------------------
Liabilities and Stockholders' Equity
- -------------------------------------
Current Liabilities
Current installments of long term debt $2,500 $2,476
Accounts payable 3,015 2,692
Accrued expenses 1,495 2,007
---------------------------
Total current liabilities 7,010 7,175
---------------------------
Long term debt, excluding current installments 24,953 16,591
Deferred income taxes 235 231
---------------------------
Total liabilities 32,198 23,997
---------------------------
Stockholders' Equity
Common stock 49 48
Additional paid-in-capital 20,332 20,209
Retained earnings 4,199 2,595
Unearned shares restricted to employee stock
ownership plan (420) (420)
---------------------------
24,160 22,432
Treasury stock (1,313) (1,313)
---------------------------
Total stockholders' equity 22,847 21,119
---------------------------
$55,045 $45,116
---------------------------
---------------------------
Page 5 of 15
<PAGE>
Microtek Medical, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
-----------------------
May 31, May 31,
1996 1995
-----------------------
Cash flows from operating activities
Net earnings $1,593 $784
Adjustments to reconcile net earnings to cash
provided (used) by operating activities:
Depreciation and amortization 1,089 524
Changes in assets and liabilities:
Accounts receivable (768) (159)
Inventories (1,966) 1,482
Prepaid expenses and other current assets (352) 111
Accounts payable 323 399
Accrued expenses (511) (283)
-----------------------
Net cash provided (used) by operating activities (593) 2,858
-----------------------
Cash flows from investing activities
Additions to property, plant, and equipment
net of acquisitions (579) (1,145)
Acquisitions (6,925) -
(Increases) in other intangibles (154) (271)
-----------------------
Net cash used by investing activities (7,658) (1,416)
-----------------------
Cash flows from financing activities
Net (repayments) borrowings under credit agreements 8,385 (565)
Cash provided from exercised options 124 -
Purchase of treasury stock - (886)
-----------------------
Net cash (provided) used in financing activities 8,509 (1,451)
-----------------------
Net increase (decrease) in cash 258 (9)
Cash at beginning of period 308 233
-----------------------
Cash at end of period $566 $224
-----------------------
-----------------------
Page 6 of 15
<PAGE>
Microtek Medical, Inc.
Notes to Consolidated Financial Statements
(1) Unaudited Interim Financial Statements
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments that are necessary for a fair presentation, have been
included in the unaudited financial information for the interim periods ended
May 31,1996 and May 31, 1995.
Page 7 of 15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Microtek Medical, Inc.:
We have reviewed the condensed consolidated balance sheet of Microtek Medical,
Inc. and subsidiaries as of May 31, 1996, the related condensed consolidated
statements of earnings for the three-month and six-month periods ended May 31,
1996 and 1995, and the related condensed consolidated statements of cash flows
for the six-month periods ended May 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Microtek Medical, Inc. and
subsidiaries as of November 30, 1995 and the related consolidated statements of
earnings, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated January 17, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of November 30, 1995, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Jackson, Missisippi KPMG Peat Marwick LLP
June 21, 1996
Page 8 of 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES Net sales for the second quarter of fiscal 1996 increased 41% to $9.9
million from $7.0 million in the second quarter of fiscal 1995. For the six
month period ended May 31, 1996, net sales increased 35% to $19.0 million from
$14.2 million for the six month period ended May 31, 1995. The increases in net
sales is associated with increases in base unit sales and the impact of the
product line exchange which occurred during the third quarter of fiscal 1995 and
the impact of acquisitions that occurred during the fourth quarter of fiscal
1995 and the second fiscal quarter of 1996.
GROSS PROFIT Gross profit increased to $5.0 million in the second quarter of
fiscal 1996 as compared to $3.2 million in the second quarter of fiscal 1995.
As a percentage of net sales, gross profit increased to 50% for the second
fiscal quarter of 1996 as compared to 45% for the second fiscal quarter of 1995.
Gross profit for the six month period ended May 31, 1996 increased to $9.3
million from $6.0 million for the six month period ended May 31, 1995. As a
percentage of net sales, gross profit for the six month period ended May 31,1996
was 49% as compared to 43% for the six month period ended May 31, 1995. This
increase is the result of increased sales and the continued transition impact of
moving significant production to the Company's Dominican Republic manufacturing
facilities, and the impact of the product line exchange and the acquisitions
that occurred in fiscal 1995 and 1996.
EARNINGS FROM OPERATIONS Earnings from operations increased to $1.7 million in
the second quarter of fiscal 1996 as compared to $.9 million in the second
quarter of fiscal 1995. For the six month period ended May 31, 1996, earnings
from operations increased to $3.2 million as compared to $1.6 million for the
six month period ended May 31, 1995. The increase in earnings from operations
can be attributed to higher gross profit for fiscal 1996, offset by higher
selling, general, and administrative expenses and amortization expense for
fiscal 1996 as compared to fiscal 1995. As a percentage of net sales, selling,
general and administrative cost decreased to 30% for the second quarter of
fiscal 1996 as compared to 31% for the second quarter of fiscal 1995. For the
six month period ended May 31, 1996, selling, general and administrative cost
stated as a percentage of net sales decreased to 29% as compared to 31% for the
six month period ended May 31, 1995. Selling, general and administrative cost as
a percentage of net sales decreased because of lower variable selling cost, such
as commissions, as a percent of net sales. The lower commission costs are
primarily associated with sales mix. The increase in amortization expense is
related to goodwill from the product line exchange and the acquisitions that
occurred in fiscal 1995 and 1996.
NET EARNINGS As a result of increased sales and gross profits, and selling,
general, and administrative expenses, net earnings increased to $.9 million for
the second quarter of fiscal 1996 as compared to $.4 million for the second
fiscal quarter of 1995. For the six month period ended May 31,1996, net
earnings increased to $1.6 million as compared to $.8 million for the six month
period ended May 31, 1995.
Page 9 of 15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES At May 31, 1996 the Company had a $9.0
million revolving credit facility, of which $8.3 million of borrowings were
outstanding. The credit facility is secured by substantially all of the
Company's assets and currently bears interest at LIBOR plus 1.5% or the lenders
base rate plus .5%. At May 31, 1996, the interest rate on $4.5 million of the
outstanding revolver was tied to the LIBOR rate. In addition to the revolving
credit facility, the Company also had outstanding at May 31, 1996 a term loan in
the amount of $13.0 million and $5.0 million in unsecured acquisition notes
payable. The term loan is secured by property, plant, and equipment, and bears
interest at LIBOR plus 1.75% and is payable in twenty quarterly installments of
$600,000 plus interest, through November, 2000.
Working capital at May 31,1996 was $15.8 million as compared to $10.3 million at
November 30, 1995. The Company's current ratio is 3.26 at February 28, 1996 as
compared to 2.43 at November 30, 1995.
The Company's accounts receivable turnover ratio remained stable for the first
six months of fiscal 1996. Inventories increased $2.0 million dollars in the
first six months of fiscal 1996. A portion of the increase in inventories was
the result of planned increases of certain finished products and raw materials
to increase product response time and to minimize the possibility of out of
stock situations that could occur because of the significant lead times
associated with manufacturing in the Dominican Republic. The balance of the
increase in inventories can be associated with the acquisitions that have
occurred during the past seven months. The decrease in accrued expenses is the
result of the payment of certain obligations which had been accrued at November
30, 1995. Cash used by operating activities was $.6 million for the six months
ended May 31, 1996 as compared to cash provided by operating activities of $2.8
million for the six months ended May 31, 1995. This decrease resulted primarily
from increased earnings, offset by the above changes in current assets and
liabilities.
The increase in cash used by investing activities is primarily the result of
lower additions to property, plant and equipment, offset by the cost of two
acquisitions which occurred during the second fiscal quarter of 1996. The
Company anticipates that funds generated from operations, together with its
existing credit facility will be sufficient to fund all investing activities for
the current fiscal year. In the event that appropriate opportunities arise to
acquire as yet unidentified product lines or businesses related to the Company's
business, the Company may require additional financing to pursue these
acquisition opportunities.
The net decrease in cash flows from operating activities and the increase in
cash used by investing activities resulted in net borrowings of $8.4 million in
the six months ended May 31, 1996.
EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES The Company does not believe
its operations have been adversely affected by inflation.
Page 10 of 15
<PAGE>
The Company currently purchases all materials used in its products in US
dollars. The effect of a weaker dollar throughout the second quarter of fiscal
1996 has not had a material effect on the Company. The Company had export sales
denominated in British Pounds of L.4 million or $.6 million dollars. As sales
denominated in British Pounds increase, the Company could be affected by the
relationship of the U.S. dollar to the foreign currency.
NEW ACCOUNTING PRONOUNCEMENTS In December 1991 and October 1994, respectively,
the FASB issued SFAS No 107, "Disclosures about Fair Value of Financial
Instruments" and SFAS 119, "Disclosures about Derivative Financial Instruments
and Fair Value of Financial Instruments," which amended SFAS 107. Statements 107
and 119 require the disclosure of fair value of financial instruments (both on-
and off-balance sheet) for which it is practicable to estimate that value, the
methods and significant assumptions used to estimate fair value, and the credit
risk, market risk, cash requirements and accounting policies for such
instrument. In addition SFAS 119 encourages but does not require the disclosure
of quantitative information about interest rate, foreign exchange, commodity
price, or other market risks of derivative financial instruments that is
consistent with the way an entity manages or adjusts those risks and that is
useful for comparing the results of applying an entity's strategies to is
objective for holding or issuing the derivative financial instruments. The
Company adopted these statements on December 1, 1995. Their adoption requires
additional disclosures about fair values of financial instruments but does not
affect the results of operations of the Company.
On December 30, 1994 the AICPA published Statement of Position 94-6
"Disclosure of Certain Risk and Uncertainties." This statement was adopted by
the Company on December 1, 1995 and requires additional disclosures about the
use of estimates in preparation of the Company's financial statements and risks
resulting from concentrations of customers, suppliers, labor, markets,
geographic areas, etc.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less that the assets
carrying amount. SFAS No. 121 is effective for the Company's fiscal year
beginning December 1, 1996. The adoption of this statement is not expected to
have a material impact on the Company's consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation". This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans and is effective for the
Company's fiscal year beginning December 1, 1996. The adoption of this
statement will require additional disclosure regarding stock based compensation,
but is not expected to have a material impact on the results of operations of
the Company.
There are presently no other recent pronouncements that will have a
material impact on the Company.
Page 11 of 15
<PAGE>
ITEM 5. OTHER INFORMATION.
On June 23, 1996, the Company entered into a revised definitive merger
agreement with Isolyser Company, Inc., pursuant to which the Company would
become a wholly owned subsidiary of Isolyser in a pooling-of-interest
transaction. Pursuant to the revised agreement, Microtek's shareholders will
receive Isolyser common stock in an exchange ratio that values Microtek stock at
$16.50 per share if the average price of Isolyser common stock is between $10.00
and $15.00 per share; a fixed exchange ratio of 1.1 shares of Isolyser stock if
the average price per share of Isolyser stock is $15.00 or more; and a fixed
exchange ratio of 1.65 shares of Isolyser stock if the average price per share
of Isolyser stock is $10.00 or less. If the average price of Isolyser stock is
less than $10.00 per share, then either Isolyser or Microtek may elect to
terminate the merger agreement. The average price per share of Isolyser common
stock will be determined over a 20-day trading period immediately preceding the
fifth trading day prior to the closing.
The merger is subject to approval by shareholders of both Microtek and
Isolyser and to normal regulatory approvals and other customary conditions.
The transaction is expected to close during the third calendar quarter of
1996 and is subject to satisfaction of all closing conditions.
Page 12 of 15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit 15 Letter Re: Unaudited financial information
B. A report on Form 8-K was filed on May 15, 1996, regarding the acquisition
of the assets of the Venodyne division ("Venodyne") of Advanced Instruments,
Inc. The required financial statements of Venodyne were filed on Form 10-K/A
(Amendment No. 2) which was filed on May 23,1996.
Page 13 of 15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 15, 1996
MICROTEK MEDICAL, INC.
(Registrant)
/S/ Kimber L. Vought
------------------------------
Kimber L. Vought
President and Chief Executive Officer
/S/ Dan R. Lee
-------------------------------
Dan R. Lee
Chief Financial and
Operating Officer
Page 14 of 15
<PAGE>
Exhibit 15
Microtek Medical, Inc.
Columbus, Mississippi
Gentlemen:
Re: May 31, 1996 Quarterly Report on Form 10Q
With respect to the subject Quarterly Report, we acknowledge our awareness of
the use therein of our report dated June 21, 1996 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act, such report is not considered
a part of a registration statement prepared or certified by an accountant or a
report prepared or certified by an accountant within the meaning of Sections 7
and 11 of the Act.
Very truly yours,
Jackson, Mississippi KPMG Peat Marwick LLP
June 21, 1996
E-1
Page 15 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF MICRATEK MEDICAL, INC. AND
SUBSIDIARIES FOR THE THREE-MONTH AND SIX MONTH PERIODS ENDED MAY 31, 1995 AND
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 566
<SECURITIES> 0
<RECEIVABLES> 7736
<ALLOWANCES> 240
<INVENTORY> 13717
<CURRENT-ASSETS> 22826
<PP&E> 9636
<DEPRECIATION> 3818
<TOTAL-ASSETS> 55045
<CURRENT-LIABILITIES> 7010
<BONDS> 24953
0
0
<COMMON> 49
<OTHER-SE> 22798
<TOTAL-LIABILITY-AND-EQUITY> 55045
<SALES> 9970
<TOTAL-REVENUES> 19037
<CGS> 9690
<TOTAL-COSTS> 9690
<OTHER-EXPENSES> 6121
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 687
<INCOME-PRETAX> 2539
<INCOME-TAX> 946
<INCOME-CONTINUING> 1598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1593
<EPS-PRIMARY> 0
<EPS-DILUTED> .32
</TABLE>
