-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UIvokDcwe7Ezfv+N3o9HRcAPNVM5rYP6Lj1RRdSiJ/RUvN9fThXE/obAqibA2WTS hEMqE3Fe6KkHL/SSmk2WsQ== 0000914062-02-000780.txt : 20021113 0000914062-02-000780.hdr.sgml : 20021113 20021113133353 ACCESSION NUMBER: 0000914062-02-000780 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROTEK MEDICAL HOLDINGS INC CENTRAL INDEX KEY: 0000929299 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 581746149 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24866 FILM NUMBER: 02819284 BUSINESS ADDRESS: STREET 1: 512 LEHMBERG ROAD CITY: COLUMBUS STATE: MS ZIP: 39702 BUSINESS PHONE: (662) 327-1863 MAIL ADDRESS: STREET 1: 512 LEHMBERG ROAD CITY: COLUMBUS STATE: MS ZIP: 39702 FORMER COMPANY: FORMER CONFORMED NAME: ISOLYSER CO INC /GA/ DATE OF NAME CHANGE: 19940831 10-Q 1 microtek10q93002.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 2002 Commission File No. 0-24866 ------------------ ------- MICROTEK MEDICAL HOLDINGS, INC. -------------------------------- (Exact name of Registrant as specified in its charter) Georgia 58-1746149 - ------------------------------------------ ----------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 512 LEHMBERG ROAD COLUMBUS, MISSISSIPPI 39702 --------------------------- (Address of principal executive offices) (662) 327-1863 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at November 8, 2002 - ----- ------------------------------- Common Stock, $.001 par value 43,145,795 1 PART I FINANCIAL INFORMATION Item 1. Financial Statements
MICROTEK MEDICAL HOLDINGS, INC. Condensed Consolidated Balance Sheets (in thousands) (unaudited) Assets September 30, 2002 December 31, 2001 ------ ----------------------------------------- Current assets Cash and cash equivalents $ 10,112 $ 10,587 Accounts receivable, net 16,758 16,141 Other receivables 408 587 Inventory, net 25,290 27,022 Prepaid expenses and other assets 1,002 1,215 ----------------------------------------- Total current assets 53,570 55,552 ----------------------------------------- Property and equipment 23,126 21,994 Less accumulated depreciation (16,167) (14,455) ----------------------------------------- Property and equipment, net 6,959 7,539 ----------------------------------------- Intangible assets, net 26,060 26,351 Deferred income taxes 2,018 2,018 Other assets, net 3,225 2,870 ----------------------------------------- Total assets $ 91,832 $ 94,330 ========================================= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities Accounts payable $ 5,045 $ 4,934 Accrued expenses 3,312 3,091 Accrued customer rebates - 490 Current portion of long-term debt 241 260 Deferred licensing revenue 357 1,427 Product financing agreement - 404 ----------------------------------------- Total current liabilities 8,955 10,606 ----------------------------------------- Long-term debt 7,151 12,649 Other long-term liabilities 1,977 1,487 ----------------------------------------- Total liabilities 18,083 24,742 ----------------------------------------- Shareholders' equity Common stock 43 43 Additional paid-in capital 211,318 210,251 Accumulated deficit (135,036) (138,636) Cumulative translation adjustment (81) (239) Unrealized loss on available for sale securities (113) (96) Unearned shares restricted to employee stock ownership plan (60) (60) ----------------------------------------- 76,071 71,263 Treasury shares, at cost (2,322) (1,675) ----------------------------------------- Total shareholders' equity 73,749 69,588 ----------------------------------------- Total liabilities and shareholders' equity $ 91,832 $ 94,330 =========================================
See notes to condensed consolidated financial statements. 2
MICROTEK MEDICAL HOLDINGS, INC. Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands, except per share data) (unaudited) Three months ended Three months ended Nine months ended Nine months ended September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 ------------------- ------------------- --------------------- ---------------------- Net sales $ 21,808 $ 21,492 $ 63,448 $ 58,708 Licensing revenues 357 377 1,070 1,133 ------------------- ------------------- --------------------- ---------------------- Net revenues 22,165 21,869 64,518 59,841 Cost of goods sold 13,597 12,816 38,889 35,655 ------------------- ------------------- --------------------- ---------------------- Gross profit 8,568 9,053 25,629 24,186 Operating expenses: Selling, general and administrative 6,579 6,525 20,496 18,463 Research and development 155 382 572 1,280 Amortization of intangibles 114 395 342 1,093 ------------------- ------------------- --------------------- ---------------------- Total operating expenses 6,848 7,302 21,410 20,836 ------------------- ------------------- --------------------- ---------------------- Income from operations 1,720 1,751 4,219 3,350 Interest income 35 67 110 256 Interest expense (148) (251) (518) (594) Equity in earnings of investee 10 - 27 - Other income - - 47 - ------------------- ------------------- --------------------- ---------------------- Income before income taxes 1,617 1,567 3,885 3,012 Income tax provision 135 144 285 317 ------------------- ------------------- --------------------- ---------------------- Net income 1,482 $ 1,423 $ 3,600 $ 2,695 =================== =================== ===================== ====================== Other comprehensive income (loss): Foreign currency translation (loss) gain (49) (104) 109 (235) Unrealized gain (loss) on available for sale securities 6 (97) (23) (116) ------------------- ------------------- --------------------- ---------------------- Comprehensive income $ 1,439 $ 1,222 $ 2,204 $ 2,344 =================== =================== ===================== ====================== Net income per common share: Basic $ 0.04 $ 0.03 $ 0.09 $ 0.06 =================== =================== ===================== ====================== Diluted $ 0.03 $ 0.03 $ 0.08 $ 0.06 =================== =================== ===================== ====================== Weighted average number of common shares outstanding - Basic 42,205 41,724 42,175 41,605 =================== =================== ===================== ====================== Diluted 42,546 42,843 42,964 42,234 =================== =================== ===================== ======================
See notes to condensed consolidated financial statements. 3
MICROTEK MEDICAL HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine months ended Nine months ended September 30, 2002 September 30, 2001 ---------------------------------------------- Cash flows from operating activities: Net income $ 3,600 $ 2,695 Adjustments to reconcile net income to net cash provided by (used in) operating Activities: Depreciation 1,802 1,848 Amortization of intangibles 342 1,093 Provision for doubtful accounts 155 10 Licensing revenues (1,070) (1,133) Provision for obsolete and slow moving inventory 89 177 Stock option compensation expense 126 - Loss on disposal of property and equipment 57 - Equity in earnings of investee (27) - Other (16) - Changes in assets and liabilities, net of effects of acquisition 1,104 (8,814) ---------------------------------------------- Net cash provided by (used in) operating activities 6,162 (4,124) ---------------------------------------------- Cash flows from investing activities: Purchase of and deposits for property and equipment (1,308) (758) Acquisitions - (12,315) ---------------------------------------------- Net cash used in investing activities (1,308) (13,073) ---------------------------------------------- Cash flows from financing activities: Net (repayments) borrowings under credit agreements (5,492) 12,541 Changes in bank overdraft 140 (169) Net repayments under notes payable (429) (416) Proceeds from exercise of stock options 487 130 Repurchase of treasury stock (647) (254) Proceeds from issuance of common stock 454 366 ---------------------------------------------- Net cash (used in) provided by financing activities (5,487) 12,198 ---------------------------------------------- Effect of exchange rate changes on cash 158 (27) ---------------------------------------------- Net decrease in cash and cash equivalents (475) (5,026) Cash and cash equivalents at beginning of period 10,587 14,379 ---------------------------------------------- Cash and cash equivalents at end of period $ 10,112 $ 9,353 ==============================================
See notes to condensed consolidated financial statements. 4 MICROTEK MEDICAL HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 1) In the opinion of management, the information furnished reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Results for the interim periods are not necessarily indicative of results to be expected for the full year. The consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "Annual Report"). 2) On May 22, 2002, the Board of Directors of the Company adopted a resolution to change the Company's name from Isolyser Company, Inc. to Microtek Medical Holdings, Inc. Shareholder approval of the name change was not required. This name change was effective as of July 1, 2002. The name change did not change the Company's existing structure or ownership. 3) Inventories are stated at the lower of cost or market and are summarized as follows: (in thousands) September 30, 2002 December 31, 2001 ------------------ ----------------- Raw materials and supplies $ 12,458 $ 13,504 Work in process 754 890 Finished goods 13,996 14,634 ----------------- -------------------- 27,208 29,028 Reserves for slow moving and obsolete inventories (1,918) (2,006) ----------------- -------------------- Inventory, net $ 25,290 $ 27,022 ================= ==================== At September 30, 2002 and December 31, 2001, the net OREX inventory was approximately $2.4 million and $2.6 million, respectively. Included in the OREX inventories at September 30, 2002 were finished goods of $317,000 and raw materials of $2.1 million. 4) Effective February 2, 2001, Microtek Medical, Inc. ("Microtek"), a subsidiary of the Company, entered into a definitive agreement to acquire substantially all of the assets of Deka Medical, Inc. ("Deka") for cash. Concurrently with the signing of the definitive agreement, Microtek acquired Deka's post-surgical clean-up product line. Effective March 2, 2001, Microtek concluded the acquisition by acquiring substantially all of the assets of Deka used in Deka's patient and medical equipment drape product line. The allocation of the total purchase price of approximately $11.6 million resulted in an excess of purchase price over the fair value of the net assets acquired (goodwill) of approximately $3.3 million. The above described acquisition was accounted for under the purchase method, and accordingly, the results of operations related to the acquired assets have been included in the accompanying condensed consolidated financial statements from the date of acquisition. The following unaudited pro forma financial information reflects the Company's results of operations as if the Deka acquisition had been completed on January 1, 2001: Nine months ended (in September 30, 2001 --------------------- (thousands, except per share data) Net revenues $ 63,591 Net income 2,704 Net income per common share - basic and diluted $ 0.06 5 The pro forma financial information is based on estimates and assumptions which management believes are reasonable. However, the pro forma results are not necessarily indicative of the operating results that would have occurred had the Deka acquisition been consummated as of the date indicated, nor are they necessarily indicative of future operating results. 5) The Company maintains a $17.5 million credit agreement (as amended to date, the "Credit Agreement") with the Chase Manhattan Bank (the "Bank"), consisting of a revolving credit facility maturing on June 30, 2004. Borrowing availability under the revolving credit facility is based on the lesser of (i) a percentage of eligible accounts receivable and inventory or (ii) $17.5 million, less any outstanding letters of credit issued under the Credit Agreement. Revolving credit borrowings bear interest, at the Company's option, at either a floating rate approximating the Bank's prime rate plus an interest margin (5.25% at September 30, 2002) or LIBOR plus an interest margin (4.16% at September 30, 2002). There were outstanding borrowings under the revolving credit facility of $6.9 million at September 30, 2002 and $12.4 million at December 31, 2001. 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 earnings, and limitations on acquisitions, dispositions, capital expenditures and additional indebtedness. In addition, the Company is not permitted to pay any dividends. 6) 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. The difference between basic and diluted weighted average shares is attributable to 341,000 and 789,000 dilutive stock options outstanding for the three months and nine months ended September 30, 2002, respectively. There were 1.1 million and 629,000 dilutive stock options outstanding for the three months and nine months ended September 30, 2001, respectively. 7) On February 11, 2000, the Company paid $249,000 for approximately 7.5% interest in Consolidated Ecoprogress Technology, Inc. ("CES"). CES is a Canadian environmental technology company focused on being a leader in developing and selling biodegradable and disposable absorbent products such as diapers, feminine hygiene, adult incontinence and other products. This investment is classified as available for sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, and is carried at fair market value. Unrealized gains and losses in the investment's fair market value are recorded as a separate component of shareholders' equity, and unrealized losses that are other than temporary are recognized in net income. The value of this investment as of September 30, 2002 was $81,000. Losses recognized in the statement of operations during the three months ended September 30, 2002 amounted to $55,000. 8) At December 31, 2001, the Company had restructuring reserves of $101,000. Additions and charges against the reserves totaled $265,000 and $291,000, respectively, during the nine months ended September 30, 2002, leaving a balance of $75,000 in the reserves at September 30, 2002. The activity is shown below:
(in thousands) December 31, 2001 September 30, 2002 Description Balance Additions Deductions Balance - ----------- ------------ ----------- ------------ ------------ Severance and consulting $ 26 $ 265 $ (291) $ - arrangements Impaired equipment reserve 75 - - 75 ------------ ----------- ------------ ------------ Total $ 101 $ 265 $ (291) $ 75 ============ =========== ============ ============
During the nine months ended September 30, 2002, severance and vacation benefits totaling $265,000 were accrued and paid with respect to the termination of 29 employees of Microtek's Columbus, Mississippi facility, 19 employees of 6 Microtek's Waynesville, North Carolina facility, two employees of Microtek's Tyler, Texas facility and five employees of the Company's OTI division. 9) In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, Goodwill and Other Intangible Assets, which requires that the amortization of goodwill cease prospectively upon adoption and instead, the carrying value of goodwill be evaluated using an impairment approach. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and was implemented by the Company on January 1, 2002. The Company has chosen June 30th as its annual impairment test date. The Company's transitional impairment test was performed as of June 30, 2002, and no impairment loss was indicated. The Company's goodwill and intangible assets as of September 30, 2002 and December 31, 2001 are summarized as follows:
(in thousands) September 30, 2002 December 31, 2001 ------------------ ----------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ------------- ------------ ------------- ------------ Goodwill $ 29,197 $ 6,732 $ 29,953 $ 7,488 Customer lists 586 81 586 62 Covenants not to compete 575 230 575 124 Patent and license agreements 3,897 1,856 3,847 1,701 Other 887 183 887 122 ------------- ------------ ------------- ------------ Total $ 35,142 $ 9,082 $ 35,848 $ 9,497 ============= ============ ============= ============
The following financial information is presented as if SFAS No. 142 was adopted at the beginning of the quarter ended September 30, 2001:
Three months ended Nine months ended (in thousands, except per share data) September 30, 2001 September 30, 2001 ------------------ ------------------ Net income as reported $ 1,423 $ 2,695 Goodwill amortization 278 781 --------- --------- Adjusted net income $ 1,701 $ 3,476 ========= ========= Net income per common share - basic and diluted: As reported $ 0.03 $ 0.06 Goodwill amortization 0.01 0.02 --------- --------- As adjusted $ 0.04 $ 0.08 ========= =========
Amortization expense related to intangible assets was $114,000 and $117,000 for the three months ended September 30, 2002 and 2001, and was $342,000 and $312,000 for the nine months ended September 30, 2002 and 2001, respectively. Following is the estimated annual amortization expense subsequent to December 31, 2001: 7 Amortization Year Expense ---- ------- 2002 - 2004 $454,000 2005 431,000 2006 287,500 2007-2011 281,000 2012 161,500 2013 75,000 2014-2015 70,000 2016 24,000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net revenues for the three months ended September 30, 2002 (the "2002 Quarter") were $22.2 million, an increase of $296,000 or 1.4 percent from the $21.9 million of net revenues reported for the three months ended September 30, 2001 (the "2001 Quarter"). Net revenues for the nine months ended September 30, 2002 (the "2002 Period") were $64.5 million, an increase of $4.7 million or 7.8 percent over the $59.8 million of net revenues reported for the nine months ended September 30, 2001 (the "2001 Period"). Excluding licensing revenues associated with the amortization of the $10.5 million payment by Allegiance allocated to the Company's Supply and License Agreement with Allegiance, net revenues in the 2002 Quarter and 2002 Period were $21.8 million and $63.4 million, respectively, as compared to $21.5 million in the 2001 Quarter and $58.7 million in the 2001 Period. The increase in net revenues in the 2002 Quarter as compared to the 2001 Quarter is primarily attributable to increased revenues from the Company's CleanOp product line and international business. These increases were substantially offset by the substantial amount of non-recurring order backlog in 2001 assumed in conjunction with the Deka acquisition which occurred in the first quarter of 2001. The increase in net revenues in the 2002 Period as compared to the 2001 Period is primarily attributable to the drape and CleanOp product lines acquired from Deka, substantial international net revenue growth, and growth of CleanOp product line revenues since being acquired from Deka. For the 2002 Quarter, Microtek's net revenues totaled $21.2 million, substantially equal to those reported for the 2001 Quarter. Microtek's net revenues for the 2002 Period were $62.5 million, approximately $4.5 million more than the $58.0 million reported in the 2001 Period. The following tables depict Microtek's domestic and international revenues and the relative percentage of each to Microtek's total revenues for the 2002 Quarter and 2001 Quarter and for the 2002 Period and the 2001 Period:
Three months ended Three months ended September 30, 2002 September 30, 2001 ------------------ ------------------ Amount % of Total Amount % of Total ------------ ----------- ----------- ---------- Domestic $ 17.8 84.0% $ 18.1 85.5% International 3.4 16.0% 3.1 14.5% ------------ ----------- ----------- ---------- Total $ 21.2 100.0% $ 21.2 100.0% ============ =========== =========== ========== Nine months ended Nine months ended September 30, 2002 September 30, 2001 ------------------ ------------------ Amount % of Total Amount % of Total ------------ ----------- ----------- ---------- Domestic $ 53.3 85.2% $ 50.6 87.2% International 9.2 14.8% 7.4 12.8% ------------ ----------- ----------- ---------- Total $ 62.5 100.0% $ 58.0 100.0% ============ =========== =========== ==========
Microtek's domestic revenues are generated through two primary channels or customer categories: hospital branded and contract manufacturing (commonly referred to as OEM). Also included in the Company's OEM revenues are sales of 8 products to custom procedure tray companies and other "non-branded" or private label customers. Microtek's domestic revenues in the 2002 Quarter decreased by $290,000 from the 2001 Quarter. This decrease was due to a decline of $914,000 in OEM revenues in the 2002 Quarter as compared to the 2001 Quarter. As discussed above, OEM net revenues for the 2001 Quarter included a substantial amount of order backlog assumed in conjunction with the Deka acquisition. Revenues from such backlog were not recurring in the 2002 Quarter. Further, OEM net revenues were negatively impacted by pricing pressures and declining sales to a significant customer. Microtek's hospital branded net revenues for the 2002 Quarter increased by $624,000 from the 2001 Quarter. Growth in the CleanOp product line acquired from Deka and in Microtek's core hospital branded revenues continue to be offset by declines in safety product revenues resulting from increased competitive pressures. On a year-to-date basis, OEM revenues in the 2002 Period increased by $1.5 million or 6.6 percent from the 2001 Period due primarily to revenues from the angiography drape and equipment drape product lines acquired from Deka. Hospital branded net revenues in the 2002 Period were approximately $1.2 million higher than in the 2001 Period due primarily to a $1.8 million increase in revenues from the CleanOp product line acquired from Deka and to modest growth in Microtek's core hospital branded product lines. These increases in hospital branded net revenues were offset by a decrease of $1.6 million in safety products revenues in the 2002 Period. Microtek's international net revenues were $3.4 million for the 2002 Quarter, an increase of $300,000 or 10.2 percent over the 2001 Quarter. International revenues for the 2002 Period were $9.2 million, or $1.8 million more than the $7.4 million reported for the 2001 Period. The improvements in the 2002 Quarter and 2002 Period are attributable to international revenues stemming from the Deka acquisition and internal growth of approximately 15 percent. OTI's net revenues were $951,000 in the 2002 Quarter versus $631,000 in the 2001 Quarter. OTI's net revenues were approximately $2.0 million in the 2002 Period as compared to $1.6 million in the 2001 Period. Licensing revenues in the 2002 Quarter and 2002 Period were $357,000 and $1.1 million, respectively, as compared to $377,000 and $1.1 million in the 2001 Quarter and 2001 Period, respectively. The Company will cease to recognize the non-cash licensing revenues in December 2002. Included in OTI's net revenues for the 2002 Quarter and 2002 Period were revenues related to its nuclear operations of approximately $356,000 and $470,000, respectively. As announced in May 2002, the Company has entered into an agreement with Eastern Technologies, Inc. ("ETI") and has transferred most of the sales and marketing responsibilities for its OREX nuclear product line to ETI. Under this agreement, ETI serves as the exclusive licensee of OREX LaunderableTM products for sale in the United States and Canada and a nonexclusive licensee of OTI's Certified SolubleTM products in that territory. Additionally ETI serves as the exclusive operator of processing services to the nuclear power industry for these products in the United States and Canada. Gross margins in the 2002 Quarter and 2002 Period were 38.7 percent and 39.7 percent, respectively, down from the margins of 41.4 percent recorded in the 2001 Quarter and 40.4 percent recorded in the 2001 Period. These margin declines are attributable to the slightly dilutive nature of Microtek's OEM and international businesses. Also contributing to the margin shortfall in 2002 were costs of relocating certain of Microtek's domestic production to its offshore plants. These costs include but are not limited to severance expenses. Operating expenses as a percentage of net revenues in the 2002 Quarter were 30.9 percent versus 33.4 percent in the 2001 Quarter. For the 2002 Period, operating expenses as a percentage of net revenues were 33.2 percent as compared to 34.8 percent for the 2001 Period. Selling, general and administrative expenses were $6.6 million or 29.7 percent of net revenues in the 2002 Quarter, versus $6.5 million or 29.8 percent of net revenues in the 2001 Quarter. For the 2002 Period, selling, general and administrative expenses were $20.5 million or 31.8 percent of net revenues, as compared to $18.5 million or 30.9 percent of net revenues in the 2001 Period. During the 2002 Quarter, the Company recorded additional severance and reorganization costs of approximately $120,000, bringing year-to-date severance costs to approximately $600,000. These severance and restructuring expenses in the 2002 Period amount to approximately $0.01 per basic and diluted share and have increased selling, general and administrative expenses as a percentage of net revenues in 2002 by approximately 1.0 percent. Additionally, the increases noted in the absolute dollar amount of selling, 9 general and administrative expenses and in selling, general and administrative expenses as a percentage of net revenues in 2002 result from the Company's expansion of its marketing focus and allocation of additional resources to marketing its branded products. Research and development expenses decreased by $227,000 and $708,000 in the 2002 Quarter and 2002 Period, respectively, as compared to the 2001 Quarter and 2001 Period, due to significant reductions in product development costs. The reduction in research and development expenses reflects the Company's more narrow focus on new market opportunities in the nuclear power industry for its OREX Degradable products and new healthcare market opportunities for Microtek. Amortization of intangibles in the 2002 Quarter and 2002 Period was $114,000 and $342,000, respectively, a decrease of $281,000 from the 2001 Quarter and $751,000 from the 2001 Period. These decreases result primarily from the Company's adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, at which time the Company ceased the amortization of its goodwill. Had the provisions of SFAS No. 142 been in effect beginning on January 1, 2001, amortization of intangibles for the 2001 Quarter and 2001 Period would have decreased by approximately $278,000 and $781,000, respectively. The decrease attributable to non-amortization of goodwill in the 2002 Period was offset slightly by the amortization of identifiable intangible assets acquired in the Deka and MICROBasix acquisitions which were completed in the 2001 Period. Income from operations for the 2002 Quarter and 2002 Period was $1.7 million and $4.2 million, respectively, versus $1.8 million in the 2001 Quarter and $3.4 million in the 2001 Period. For the 2002 Quarter, Microtek's operating profit of $1.7 million declined by $377,000 from the $2.1 million recorded in the 2001 Quarter. For the 2002 Period, Microtek's operating profit was $4.7 million, approximately $255,000 less than the operating profit of $5.0 million recorded in the 2001 Period. The Company's OTI division reported an operating income of $32,000 in the 2002 Quarter versus an operating loss of $284,000 for the 2001 Quarter, an improvement of approximately 111.1 percent. OTI's operating loss in the 2002 Period was $485,000, a 67.6 percent improvement over the operating loss of $1.5 million recorded in the 2001 Period. Interest expense, net of interest income, was $113,000 and $408,000 in the 2002 Quarter and 2002 Period, respectively, as compared to $184,000 and $338,000 in the 2001 Quarter and 2001 Period, respectively. The $71,000 decrease in net interest expense in the 2002 Quarter as compared to the 2001 Quarter is attributable to lower average borrowings under the Company's lines of credit facility during the 2002 Quarter. The $70,000 increase in net interest expense in the 2002 Period as compared to the 2001 Period is the result of increased interest expense resulting from higher average borrowings and lower interest income on cash and cash equivalents due to lower average cash balances during 2002. The Company's provision for income taxes in the 2002 Quarter and 2002 Period reflects expense of $135,000 and $285,000, respectively. Due to the Company's federal net operating loss carryforwards, this expense consists primarily of state and foreign income taxes. The resulting net income for the 2002 Quarter was $1.5 million, or $0.04 per basic share and $0.03 per diluted share, bringing the Company's net income for the 2002 Period to $3.6 million, or $0.09 per basic share and $0.08 per diluted share. While the Company's net income for the 2002 Quarter is relatively consistent with the net income reported for the 2001 Quarter, the Company's earnings for the 2002 Period represent an increase of approximately $905,000, or 33.6 percent, over the net income reported for the 2001 Period. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2002, the Company's cash and cash equivalents totaled $10.1 million as compared to $10.6 million at December 31, 2001. During the 2002 Period, the Company's operating activities provided cash of $6.2 million as compared to cash used in operating activities of $4.1 million in the 2001 Period. The increase in cash provided by operating activities in the 2002 10 Period is attributable to the Company's increased profitability in the 2002 Period and improved working capital management, particularly in inventories. Cash used in investing activities in the 2002 Period was $1.3 million, as compared to $13.1 million in the 2001 Period. Investing activities in the 2002 Period consisted of the purchase of property and equipment. Investing activities in the 2001 Period included the Deka and MICROBasix acquisitions which consumed approximately $12.3 million in cash and purchases of property and equipment of $758,000. During the 2002 Period, cash used in financing activities was $5.5 million. Repayments under the Company's Credit Agreement and other long-term debt agreements in the 2002 Period totaled $5.9 million. Included in this amount was a lump sum payment to Thantex of $341,000 under the product financing agreement described in the Company's Annual Report. This payment satisfied in full the Company's remaining obligation under this agreement. During the 2002 Period, the Company received $941,000 in proceeds from the exercise of stock options and issuance of stock and purchased 335,000 shares of stock for $647,000. Cash provided by financing activities in the 2001 Period was $12.2 million which consisted primarily of net borrowings under the Company's Credit Agreement and other long-term debt agreements of $12.1 million. The Company maintains a $17.5 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, 2004. Borrowing availability under the revolving credit facility is based on the lesser of (i) a percentage of eligible accounts receivable and inventory or (ii) $17.5 million, less any outstanding letters of credit issued under the Credit Agreement. Outstanding borrowings under the revolving credit facility were $6.9 million and $12.4 million at September 30, 2002 and December 31, 2001, respectively. As of September 30, 2002, the Company had additional borrowing availability under the revolving facility of $7.9 million. As of November 8, 2002, the Company's borrowing availability under the revolving facility was $15.1 million, of which the Company had borrowed $4.5 million. Revolving credit borrowings bear interest, at the Company's option, at either a floating rate approximating the Bank's prime rate plus an interest margin (5.25% at November 8, 2002) or LIBOR plus an interest margin (4.16% at November 8, 2002). At September 30, 2002, the Company was in compliance with its financial covenants under the Credit Agreement. Based on its current business plan, the Company expects that cash equivalents and short term investments 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. The Company's liquidity is not dependent upon the use of off-balance sheet financing arrangements. Currently unforeseen future developments and increased working capital requirements may require additional debt financing or issuance of common stock in 2002 and subsequent years. CRITICAL ACCOUNTING POLICIES. While the listing below is not inclusive of all of the Company's accounting policies, the Company's management believes that the following policies are those which are most critical and embody the most significant management judgments and the uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These critical policies are: Revenue Recognition. The Company's revenues are derived from the sale of its products and are recognized at the time of shipment (i) when persuasive evidence of a sale arrangement exists, (ii) delivery has occurred, (iii) the price is fixed and determinable, and (iv) collectibility of the associated receivable is reasonably assured. As discussed below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of the Company's revenues for any period if management made different judgments or utilized different estimates. All sales of the Company's products are evidenced by a binding purchase order as evidence of a sale arrangement. Sales through the Company's distributors are evidenced by a master agreement which governs the relationship together with a binding purchase order on a transaction by transaction basis. Delivery generally occurs when the Company's products are delivered to a common carrier. 11 At the time of a sale transaction, the Company assesses whether the related sales price is fixed and determinable based on the payment terms associated with the transaction. Sales prices due within the Company's normal payment terms, which are 30 to 60 days from the invoice date for its domestic customers and 90 to 120 days from the invoice date for international customers, are considered fixed and determinable. The Company does not generally extend payment terms outside its normal guidelines. The Company also assesses whether collection is reasonably assured at the time of the sale transaction based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. Sales Returns and Other Allowances and Allowance for Doubtful Accounts. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, management must make estimates of potential future product returns related to current period product revenues. The Company's sales arrangements do not generally include acceptance provisions or clauses. Additionally, the Company does not typically grant its distributors or other customers price protection rights or rights to return products bought, other than normal and customary rights of return for defects in materials or workmanship, and is not obligated to accept product returns for any other reason. Actual returns have not historically been significant. Management analyzes historical returns, current economic trends and changes in customer demand when evaluating the adequacy of its sales returns and other allowances. Similarly, the Company's management must make estimates of the uncollectibility of its accounts receivables. Management specifically analyzes accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in its customers' payment terms when evaluating the adequacy of its allowance for doubtful accounts. The Company's accounts receivables at September 30, 2002 totaled $16.8 million, net of the allowance for doubtful accounts of $927,000. Inventory Valuation. The preparation of the Company's financial statements requires careful determination of the appropriate dollar amount of the Company's inventory balances. Such amount is presented as a current asset in the Company's balance sheet and is a direct determinant of cost of goods sold in the statement of operations and therefore has a significant impact on the amount of net income reported in an accounting period. The basis of accounting for inventories is cost, which is the sum of expenditures and charges, both direct and indirect, incurred to bring the inventory quantities to their existing condition and location. The Company's inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out ("FIFO") method, which assumes that inventory quantities are sold in the order in which they are manufactured or purchased. The Company utilizes standard costs as a management tool. The Company's standard cost valuation of its inventories is adjusted at regular intervals to reflect the approximate cost of the inventory under FIFO. The determination of the indirect charges and their allocation to the Company's work-in-process and finished goods inventories is complex and requires significant management judgment and estimates. Material differences may result in the valuation of the Company's inventories and in the amount and timing of the Company's cost of goods sold and resulting net income for any period if management made different judgments or utilized different estimates. On a periodic basis, management reviews its inventory quantities on hand for obsolescence, physical deterioration, changes in price levels and the existence of quantities on hand which may not reasonably be expected to be used or sold within the normal operating cycles of the Company's operations. To the extent that any of these conditions are believed to exist or the utility of the inventory quantities in the ordinary course of business is no longer as great as their carrying value, a reserve against the inventory valuation is established. To the extent that this reserve is established or increased during an accounting period, an expense is recorded in the Company's statement of operations, generally in cost of goods sold. Significant management judgment is required in determining the amount and adequacy of this reserve. In the event that actual results differ from management's estimates or these estimates and judgments are revised in future periods, the Company may need to establish additional reserves which could materially impact the Company's financial position and results of operation. 12 As of September 30, 2002, the Company's inventories totaled $25.3 million, net of reserves for slow moving and obsolete inventories of $1.9 million. Management believes that the Company's inventory valuation, together with the recorded reserves for slow moving and obsolete inventories, results in carrying the inventory at the lower of cost or market. Accounting for Income Taxes. In conjunction with preparing the Company's consolidated financial statements, management is required to estimate the Company's income tax liability in each of the jurisdictions in which the Company operates. This process involves estimating the Company's actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as goodwill amortization, for tax and accounting purposes. These differences result in deferred tax assets or liabilities which are reflected in the Company's consolidated balance sheet. Management must also assess the likelihood that the Company's deferred tax assets will be recovered from future taxable income. To the extent that management believes that recovery is not likely, a valuation allowance must be established and reviewed in each accounting period. Increases in the valuation allowance in an accounting period requires that the Company record an expense within its tax provision in its consolidated statement of operations. Significant management judgment is required in determining the Company's provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against the Company's net deferred tax assets. At September 30, 2002, the Company's net deferred tax assets totaled $2.0 million. The Company has recorded a valuation allowance of $40.4 million as of September 30, 2002, due to uncertainties related to the Company's ability to utilize some of its deferred tax assets, primarily consisting of net operating loss carryforwards, before they expire. The valuation allowance is based on management's estimates of taxable income by jurisdiction in which the Company operates and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates or these estimates are adjusted in future periods, the Company may need to adjust this valuation allowance which could materially impact the Company's financial position and results of operation. Valuation of Long-Lived and Intangible Assets and Goodwill. The Company assesses the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered by management in performing this assessment include, but are not limited to, the following: o The Company's performance relative to historical or projected future operating results; o The Company's intended use of acquired assets or the Company's strategy for its overall business; and o Industry or economic trends. In the event that the carrying value of intangibles, long-lived assets and related goodwill is determined to be impaired, such impairment is measured using a discount rate determined by management to be commensurate with the risk inherent in the Company's current business model. At September 30, 2002, the net book value of goodwill approximated $22.5 million and the net book value of other intangible assets approximated $3.6 million. As discussed in the footnotes to the condensed consolidated financial statements, on January 1, 2002, the Company implemented SFAS No. 142, and as a result, discontinued the periodic amortization of approximately $22.5 million of goodwill but will continue to amortize other intangible assets. Goodwill amortization for the full year of 2001 and the 2001 Period amounted to approximately $1.1 million, or $0.03 per share, and $781,000, or $0.02 per share, respectively. In lieu of amortization, the Company will be required to perform an impairment review at least annually. The Company completed its initial impairment review in the second quarter of 2002 and no impairment charge was indicated. 13 FORWOARD 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, expected amortization expenses in 2002 and future periods, the ability of the Company to meet its liquidity and capital requirements, and management judgments about future events in the application of its critical accounting policies as described under "Critical Accounting Policies" above. 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 including, without limitation, those described under "Risk Factors -History of Net Losses", "-Reliance upon Microtek", "-Competition", "-Product Liability", "-Stock Price Volatility", "-Dependence on Key Personnel", "-Anti-takeover Provisions", "-Low Barriers to Entry for Competitive Products", "-Potential Erosion of Profit Margins", "-Risks of Completing Acquisitions", "-Small Sales and Marketing Force", "-Reliance upon Distributors", "-Microtek Regulatory Risks", "-Risks of Obsolescence", "-Reduced OREX Market Potential", "-OREX Commercialization Risks", "-OREX Manufacturing and Supply Risks", "-Risks Affecting Protection of Technology", "-Risks of Technological Obsolescence" and "-OTI Regulatory Risks". We do not undertake to update our forward-looking statements to reflect future events or circumstances. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's greatest sensitivity with respect to market risk is to changes in the general level of U.S. interest rates and its effect upon the Company's interest expense. At September 30, 2002, the Company had $7.4 million long-term or short-term debt bearing interest at floating rates. Because these rates are variable, a 1% increase in interest rates would have resulted in additional interest expense of approximately $67,000 for the nine months ended September 30, 2002 and a 1% reduction in interest rates would have resulted in reduced interest expense of approximately $67,000 for the nine months ended September 30, 2002. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic Securities and Exchange Commission filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN 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. 14 ITEM 3. DEFAULT UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS None. ITEM 5. OTHER INFORMATION In accordance with Section 10A of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, the Audit Committee of the Board of Directors of the Company reviewed and approved the engagement of Deloitte & Touche LLP, the Company's independent auditors, to provide non-audit services to the Company associated with (1) the audit of the Company's 401(k) Plan, (2) the preparation of the Company's 2001 federal and state income tax returns, and (3) the review or approval, or both, of state and local real estate ad valorem taxes on the Company's real property. The Compensation Committee of the Board of Directors approved and adopted a multiple component compensation plan for each of the Company's executive officers, namely Dan R. Lee as President and Chief Executive Officer, James Michael Mabry as Executive Vice President and Chief Operating Officer, and Roger G. Wilson as Chief Financial Officer. The components of the program include a three-year employment agreement, a policy to increase the executive's beneficial ownership of the Company through periodic awards of vested stock options under the Company's 1999 Long-Term Incentive Plan, the adoption of a Sale of Business Bonus Program designed to increase shareholder value upon and in the event of a change of control of the Company, and the adoption of a Long-Term Growth Incentive Award Bonus Program designed to increase revenues of the Company while maintaining and increasing the profitability of the Company. Messrs. Lee, Mabry and Wilson are each a party to a three-year employment agreement with the Company which commenced on October 20, 2002. Pursuant to each such employment agreement, Mr. Lee will serve as President and Chief Executive Officer of the Company, Mr. Mabry will serve as Executive Vice President and Chief Operating Officer of the Company, and Mr. Wilson will serve as Chief Financial Officer of the Company. Each employment agreement specifies a minimum salary and benefits payable during the term of the employment agreement, and contains restrictive covenants including covenants relating to the protection of confidential information and restricting competition against the Company. Each employment agreement is terminable by the Company or the employee with or without cause. In the event of a termination of the employment agreement by the Company without cause, or by the employee for good reason (as the terms "cause" and "good reason" are defined), the employee will generally be entitled to severance equal to the employee's salary and annual performance bonus for the unexpired portion of the remaining term of the employment agreement and continued welfare benefits (such as health insurance) for the unexpired term of the employment agreement. In the event of any termination of the employee's employment following a change of control (as defined) of the Company, other than a termination of employment as a result of death or disability or cause, the Company is obligated to pay the employee an amount equal to three times the largest of the employee's annual salary and annual performance bonus over the current or the prior two years plus certain other amounts primarily involving the continuation of welfare benefits following the date of such termination of employment. In the event that any payments to the employee will be subject to excise taxes imposed under the Internal Revenue Code, then the payments to the employee would be increased by an amount (i.e., a tax gross-up payment) sufficient to pay all of the employee's excise taxes on such payments and any income, excise or other taxes on the gross-up payment to the employee. In connection with the completion of the aforementioned employment agreements, the Company adopted a Sale of Business Bonus Program designed to increase the value of the Company to shareholders upon and in the event of a change of control of the Company. The Sale of Business Bonus Program establishes a bonus pool determined as a percentage of appreciation in the price of the Company's common stock from a pre-established base amount to the price of a share of the 15 Company's common stock at which the event constituting a change of control (as defined) of the Company occurs. As currently adopted, the bonus pool uses the following levels of share appreciation and percentage participation in such share appreciation to fund the bonus pool:
Market Capitalization (Share Bonus Share Appreciation Appreciation multiplied by 42M) Percentage Bonus Pool ------------------ ------------------------------- ---------- --------------- $0.00 to $1.90 $ 80,598,000.00 0.00% $ 0.00 $1.90 to $5.00 $ 130,200,000.00 3.00% $ 3,906,000.00 $5.00 to $10.00 $ 210,000,000.00 3.50% $ 7,350,000.00 $10.00 to $11.00 $ 42,000,000.00 4.00% $ 1,680,000.00 ---------------- Total Bonus Pool $ 12,936,000.00 ================
The bonus pool may be allocated among employees of the Company as from time-to-time determined by the Compensation Committee of the Board of Directors, and the bonus program may be modified from time-to-time as determined by the Board of Directors. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No. Description - ----------- ----------- 3.1(1) Articles of Incorporation of Isolyser Company, Inc. 3.2(2) Articles of Amendment to Articles of Incorporation of Isolyser Company, Inc. 3.3(3) Amended and Restated Bylaws of Isolyser Company, Inc. 4.1(1) Specimen Certificate of Common Stock 10.1 Second Amendment Agreement dated as of September 30, 2002, to the Amended and Restated Credit Agreement, dated as of May 14, 2001, among Microtek Medical Holdings, Inc., Microtek Medical, Inc., Isolyser-MSI, Inc. and JP Morgan Chase Bank 10.2 Form of the Employment Agreement with the executive officers of the Company 10.3 Consulting Agreement dated August ____, 2002, between Microtek Medical Holdings, Inc. and Gene R. McGrevin - ------------------ (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-83474). (2) Incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (3) Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed April 23, 2002. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized on November 8, 2002. MICROTEK MEDICAL HOLDINGS, INC. By: /s/ Dan R. Lee ---------------------------------------------- Dan R. Lee Chairman, President & Chief Executive Officer (principal executive officer) By: /s/ R.G. Wilson ---------------------------------------------- R. G. Wilson Chief Financial Officer (principal financial officer) 17 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Dan R. Lee, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Microtek Medical Holdings, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/ Dan R. Lee --------------------------------------- Dan R. Lee Chairman, President and Chief Executive Officer 18 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, R. G. Wilson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Microtek Medical Holdings, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/ R.G. Wilson --------------------------------------- R. G. Wilson Chief Financial Officer, Treasurer and Assistant 19 1561623 EX-10.1 3 microtek10q93002ex101.txt SECOND AMENDMENT AGREEMENT EXHIBIT 10.1 SECOND AMENDMENT AGREEMENT SECOND AMENDMENT AGREEMENT, dated as of September 30, 2002 (this "Amendment Agreement"), to the Amended and Restated Credit Agreement, dated as of May 14, 2001, as amended to date (and as the same may be further amended, supplemented or modified from time to time in accordance with its terms, the "Credit Agreement"), among Microtek Medical Holdings, Inc., formerly known as Isolyser Company, Inc., a Georgia corporation ("MMH") and Microtek Medical, Inc., a Delaware corporation ("Microtek", together with MMH, each a "Borrower" and, jointly and severally, the "Borrowers"), the lenders named therein (the "Lenders"), the guarantors named therein (the "Guarantors") and JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank, as agent (the "Agent") for the Lenders. Terms used herein and not otherwise defined herein shall have the meanings attributed thereto in the Credit Agreement. WHEREAS, the Borrowers have requested and the Lenders have agreed to amend the Credit Agreement as described herein. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. AMENDMENT TO CREDIT AGREEMENT 1.1 Section 7.09 of the Credit Agreement is hereby amended in its entirety to read as follows: "SECTION 7.09 EBITDA. Permit EBITDA of the Borrowers and their subsidiaries on a Consolidated basis to be less than (i) $7,500,000 for the four quarter period ending on September 30, 2002, (ii) $8,000,000 for the four quarter period ending on December 31, 2002, (iii) $10,000,000 for the four quarter periods ending on March 31, 2003, June 30, 2003, and September 30, 2003, (vi) $11,000,000 for the four quarter period ending on December 31, 2003 and each four quarter period thereafter. For purposes hereof, EBITDA shall mean for the applicable period the sum of Net Income, depreciation and amortization, federal, state and local income taxes and interest expense for such period, computed and calculated in accordance with GAAP." SECTION 2. CONFIRMATION OF SECURITY DOCUMENTS Each Loan Party, by its execution and delivery of this Amendment Agreement, irrevocably and unconditionally ratifies and confirms in favor of the Agent that it consents to the terms and conditions of the Credit Agreement as it has been amended by this Amendment Agreement and that notwithstanding this Amendment Agreement, each Security Document to which such Loan Party is a party shall continue in full force and effect in accordance with its terms and is and shall continue to be applicable to all of the Obligations. 1 SECTION 3. CONDITIONS PRECEDENT This Amendment Agreement shall become effective upon the execution and delivery of counterparts hereof by the parties listed below and the fulfillment of the following conditions: (1) All representations and warranties contained in this Amendment Agreement or otherwise made in writing to the Agent in connection herewith shall be true and correct. (2) No unwaived event has occurred and is continuing which constitutes a Default or an Event of Default under the Credit Agreement. SECTION 4. MISCELLANEOUS 4.1 Each Borrower and each Guarantor reaffirms and restates the representations and warranties set forth in Article IV of the Credit Agreement and all such representations and warranties shall be true and correct on the date hereof with the same force and effect as if made on such date, except as they may specifically refer to an earlier date. Each Borrower and each Guarantor represents and warrants (which representations and warranties shall survive the execution and delivery hereof) to the Agent that: (1) it has the corporate power and authority to execute, deliver and carry out the terms and provisions of this Amendment Agreement and the transactions contemplated hereby and has taken or caused to be taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment Agreement and the transactions contemplated hereby; (2) no consent of any other person (including, without limitation, shareholders or creditors of any Borrower or any Guarantor), and no action of, or filing with any governmental or public body or authority is required to authorize, or is otherwise required in connection with the execution, delivery and performance of this Amendment Agreement; (3) this Amendment Agreement has been duly executed and delivered on behalf of each Borrower and each Guarantor by a duly authorized officer, and constitutes a legal, valid and binding obligation of each Borrower and each Guarantor enforceable in accordance with its terms, subject to bankruptcy, reorganization, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally and the exercise of judicial discretion in accordance with general principles of equity; and (4) the execution, delivery and performance of this Amendment Agreement will not violate any law, statute or regulation, or any order or decree of any court or governmental instrumentality, or conflict with, or result in the breach of, or constitute a default under any contractual obligation of any Borrower or any Guarantor. 4.2 All references to the Credit Agreement in the Credit Agreement and the other Loan Documents and the other documents and instruments delivered pursuant to or in connection therewith shall mean such Credit Agreement as amended hereby 2 and as may in the future be amended, restated, supplemented or modified from time to time. 4.3 Upon presentation of its invoice, the Borrowers covenant and agree to pay in full all legal fees charged, and all costs and expenses incurred, by Kaye Scholer LLP, counsel to the Agent, in connection with the transactions contemplated under this Agreement and the other Loan Documents and instruments in connection herewith and therewith. 4.4 This Amendment Agreement may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page by telecopier shall be effective as delivery of a manually executed counterpart. 4.5 THIS AMENDMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 4.6 The parties hereto shall, at any time and from time to time following the execution of this Amendment Agreement, execute and deliver all such further instruments and take all such further action as may be reasonably necessary or appropriate in order to carry out the provisions of this Amendment Agreement. [Remainder of this page intentionally left blank] 3 MICROTEK MEDICAL HOLDINGS, INC., formerly known as ISOLYSER COMPANY, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- MICROTEK MEDICAL, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- ISOLYSER - MSI, INC., formerly known as MEDSURG INDUSTRIES, INC., as Guarantor By: -------------------------------- Name: ------------------------------ Title: ----------------------------- JPMORGAN CHASE BANK, formerly known as THE CHASE MANHATTAN BANK, as Agent and as Lender By: -------------------------------- Name: ------------------------------ Title: ----------------------------- 4 1561531 EX-10.2 4 microtek10q93002ex102.txt FORM OF EMPLOYMENT AGREEMENT EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into effective as of the _____ day of _______________, 2002 (the "Effective Date"), by and between MICROTEK MEDICAL HOLDINGS, INC., a Georgia corporation (hereinafter the "Company"), and (hereinafter the "Employee"). RECITALS: R-1. The Company develops, manufactures and markets infection control (such as equipment and patient drapes and encapsulation products) and other products for use primarily in healthcare markets (the "Business"). R-2. The Company's markets are worldwide. R-3. The Company maintains certain trade secrets and confidential information which are proprietary to the Company, the disclosure or exploitation of which would cause significant damage to the Company. R-4. The Company desires to employ the Employee, and the Employee desires to accept such employment, for which purposes each of the Company and the Employee desire to enter into this Agreement to set forth and clarify certain of the terms and conditions relevant to such employment. R-5. The Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control (as defined herein) may arise which may create uncertainty and questions among management resulting in a departure or distraction of management personnel to the detriment of the Company and its shareholders. In addition, the Company believes that should the Company or its shareholders receive a proposal for transfer of control of the Company, 1 the Employee should be able to assess and advise the Company whether such proposal would be in the best interests of the Company and its shareholders and to take such other action regarding such proposal as the Board of Directors might determine to be appropriate without being influenced by the uncertainty of the Employee's own situation. NOW, THEREFORE, in consideration of the recitals, the covenants and agreements herein contained and the benefits to be derived herefrom, the parties, intending to be legally bound, agree as follows: 1. Recitals. The recitals set forth above constitute part of this Agreement and are incorporated herein by this reference. 2. Employment. From and after the date hereof and for the term herein provided, the Company agrees to employ the Employee as the ______________________ of Microtek Medical Holdings, Inc. and in such other executive offices to which the Board of Directors of the Company may appoint Employee. The Employee accepts such employment with the Company upon the terms and conditions hereinafter set forth. 3. Term. The Employee's employment shall commence on the Effective Date and, subject to Section 8 of this Agreement, shall continue through the third anniversary of the Effective Date. The term of this Agreement shall renew automatically for successive three (3) year terms unless either party shall have given written notice of its intent not to renew which notice shall be given at least ninety (90) days prior to the expiration of the initial or any renewal term. 4. Duties. Subject to the direction and supervision of the Board of Directors of the Company, the Employee agrees that: (a) he shall devote substantially all of his full working time and attention to the business of the Company and its affiliated companies; (b) he will perform all of his duties properly assigned to him pursuant to this Agreement faithfully and to the best of his abilities in a manner intended to advance the Company's interests; and 2 (c) he shall not engage in any other business activity except: (i) investing assets in a manner not prohibited by Section 9(e) of this Agreement, and in such form or manner as shall not require any material services on his part in the operations or affairs of the companies or other entities in which such investments are made, (ii) serving on the board of directors of any company, subject to the provisions set forth in Section 9(e) of this Agreement and provided that he shall not be required to render any material services with respect to the operations or affairs of any such company, (iii) engaging in religious, charitable or other community or non-profit activities which do not impair his ability to fulfill his duties and responsibilities under this Agreement, or (iv) such other activities as may be expressly approved in advance by the Board of Directors of the Company. 5. Compensation. As full compensation for all services rendered by the Employee pursuant to this Agreement and as full consideration for all of the terms of this Agreement, the Employee shall receive from the Company during his employment under this Agreement the base salary, bonuses and fringe benefits described below. (a) Base Salary. For all services rendered pursuant to this Agreement, the Company shall pay or cause to be paid to the Employee an annual base salary of $_______________ (the "Floor Amount"). The annual salary may be increased or (subject to the terms of this Agreement) decreased from time to time during the term of this Agreement in the discretion of the Company. The base salary shall be payable in accordance with the customary practices of the Company for payment of its employees, but in any event, in installments not less frequently than once monthly. (b) Bonus Compensation. To the extent that the Company shall establish, from time to time in its discretion, bonus compensation plans for the benefit of all of its management level employees, the Employee shall be entitled 3 to participate in such bonus compensation plans in accordance with terms and provisions established by the Board of Directors in its discretion. As used in this Agreement, the term "Annual Performance Bonus" means a bonus program which is designed to compensate the Employee based upon annual performance objectives. The term "Annual Performance Bonus Program" excludes the bonus program described in Section 5(e) hereof and any other multi-year growth incentive award program which may create extra bonus compensation on a multi-year basis even if such bonus is payable on an annual basis. (c) Long Term Incentive Payments. The Company has or may from time to time in the future grant to the Employee such long-term incentive compensation (including, by way of illustration but not limitation, stock options) as the Board of Directors may determine in its discretion. (d) Fringe Benefits. The Company has adopted, or may from time to time adopt, policies in respect of fringe benefits for its management level employees in the nature of health and life insurance, holidays, vacation, disability and other matters. The Company covenants and agrees that the Employee shall be entitled to participate in any such fringe benefit policies adopted by the Company to the same extent that such fringe benefits shall be available to and for the benefit of all other management level employees. (e) Sale of Business Bonus Program. In the event of a Change of Control under clauses (C) or (D) of Section 8(e)(i) of this Agreement, regardless of whether or not the Employee's employment with the Company terminates in connection with or following such Change of Control, the Employee shall be entitled to participate in the bonus plan described on Schedule 1 attached hereto and incorporated herein by reference. 4 (f) Tax Withholdings and Other Deductions. The Company shall have the right to deduct from the base salary and any additional compensation payable to the Employee all amounts required to be deducted and withheld in accordance with social security taxes and all applicable federal, state and local taxes and charges as may now be in effect or which may be hereafter enacted or required as charges on the compensation of the Employee. The Company shall also have the right to offset from the base salary and any additional compensation payable to the Employee any loan or other amounts owed to the Company by the Employee. 6. Working Facilities. The Company, at its own expense, shall furnish the Employee with office and working space and such equipment, personal secretarial and other assistance as may be reasonably necessary for the Employee's performance of his or her duties. 7. Expenses. The Employee is required as a condition of employment to incur ordinary, necessary and reasonable expenses for the promotion of the business of the Company and its affiliates and subsidiaries, including expenses for entertaining, travel and similar items. The Employee is authorized to incur reasonable expenses in connection with such business, including travel and entertainment expenses, fees for seminars and courses, and expenses incurred in attendance at executive meetings and conventions. If paid by the Employee, upon presentation by the Employee of an itemized account of such expenditures in a manner satisfactory to the Company, the Employee shall be entitled to receive reimbursement for these expenses, subject to policies that may be established from time to time by the Company. It is intended by the Company and the Employee that all expenses incurred pursuant to this paragraph are to be ordinary and necessary business expenses. 8. Termination. The Employee's employment may be terminated in accordance with the provisions of this Section. The provisions for termination are as follows: 5 (a) Death or Disability. The Employee's employment shall be terminated upon the death or Total Disability of the Employee. For purposes of the foregoing, the term "Total Disability" shall mean a mental or physical condition which renders the Employee unable or incompetent to carry out his or her material job responsibilities or duties and which continues for a period of 180 days and either (i) results in the payment of benefits to the Employee under the Company sponsored long term disability insurance policy or (ii) in the opinion of a physician mutually acceptable to the Company and the Employee in the exercise of their respective reasonable discretion, is expected to be permanent or to last for an indefinite duration or a duration in excess of 180 days. Upon any termination of employment under this paragraph, the Employee shall receive his or her base salary through the date of termination at the rate in effect just prior to the date of termination of employment plus any benefits or awards (including both the cash and stock component) which pursuant to the terms of any compensation plans have been earned or become payable (including, without limitation, any portion of any bonus award for which any performance conditions, other than continued employment, have been satisfied), but which have not yet been paid to the Employee (including amounts which previously have been deferred at the Employee's request). (b) Termination For Cause. The Employee's employment may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" means (i) Employee's conviction of a felony or a misdemeanor involving fraud, dishonesty or moral turpitude or Employee's willful or intentional material breach of this Agreement which results in financial detriment that is material to the Company and its affiliates as a whole; provided, that, the term "Cause" shall not include bad judgment, negligence, or any act or omission that Employee believed in good faith to have been in or not opposed to the interest of the Company (without intent of Employee to gain therefrom, directly or indirectly, a 6 profit to which he was not legally entitled). In the event of the termination of the Employee's employment for Cause, the Employee shall receive his or her base salary through the date of termination at the rate in effect just prior to the date of termination of employment. (c) Termination Without Cause. The Employee's employment may be terminated by the Company without Cause. In the event of any termination of the Employee's employment without Cause, (i) the Employee shall be entitled to receive a lump sum payment in cash equal to the sum of (A) Employee's base salary through the date of termination at the rate in effect just prior to the date of termination of employment, plus any benefits or awards (including both the cash and stock component) which pursuant to the terms of any compensation plans have been earned or become payable (including, without limitation, any portion of any bonus award for which any performance conditions, other than continued employment, have been satisfied), but which have not yet been paid to the Employee (including, without limitation, amounts which previously have been deferred at the Employee's request), and (B) an amount equal to the product of the number of whole and fractional years included during the balance of the current term of this Agreement multiplied by the largest of the following: (x) the Employee's salary and Annual Performance Bonus for the second year immediately preceding the date of termination, (y) the Employee's salary and Annual Performance Bonus for the first year immediately preceding the date of termination, or (z) the Employee's current year annual salary and annualized Annual Performance Bonus (annualizing the bonus based upon an extrapolation of any portion of the bonus amount in the current year for which the applicable performance conditions, other than continued employment, have been satisfied); and (ii) the Company shall maintain in full force and effect, at the sole cost of the Company for the continued benefit of the Employee and his or her 7 dependents for the unexpired portion of the current term of this Agreement, each of the Company's health, dental, $250,000 term life and disability insurance benefits (provided that, to the extent such benefits are not available, the Company shall provide replacement benefits on terms which, as near as may be practicable, are as favorable to the Employee as the discontinued benefits except that life and disability benefits need be provided only if the Employee remains insurable at standard rates) or, at the election of the Employee, the Company shall pay to the Employee a lump sum cash payment equal to the present value (using a 10% discount rate) of the cost to the Company of sponsoring such Company benefits (for which purposes the cost of sponsoring such Company benefits shall be assumed to equal the premiums payable for such benefits at the rate in effect just prior to the date of termination of employment) for the Employee and his or her dependents for the unexpired portion of the current term of this Agreement. The Company may require, as a condition precedent to making any payments under this paragraph to the Employee, that the Employee execute a customary release and covenant not to sue in favor of the Company. Any payments under this Section 8(c) shall be subject to Section 5(f). (d) Termination By Employee. The Employee may terminate his employment hereunder with or without Good Reason (as defined below) by written notice to the Company. In the event the Employee elects to terminate this Agreement without Good Reason, then the Employee shall offer to continue to provide services to the Company in accordance with this Agreement for a period of not less than ninety (90) days from the date that the Employee elects to resign. The Company may accept such offer in full, accept such offer subject to the Company's right to terminate the Employee's employment during such ninety (90) day period (which termination shall nevertheless be treated as a termination by Employee without Good Reason) or reject such offer in which event the Employee's 8 employment shall immediately terminate. Effective upon the date of Employee's termination of employment following the Employee's resignation without Good Reason, the Employee shall be entitled to no further compensation or benefits under this Agreement. In the event the Employee terminates his employment hereunder for Good Reason, the Employee shall be entitled to the benefits specified in Subsection (c) of this Section 8 as if Employee's employment was terminated by the Company without Cause. As used in this Agreement, the term "Good Reason" shall mean the occurrence of any one or more of the following events which continues for a period of not less thirty (30) days following written notice by the Employee to the Company unless the Employee specifically agrees in writing that such event shall not be Good Reason: (i) any material breach of this Agreement by the Company, (ii) any material adverse change in the status, responsibilities or perquisites of the Employee, (iii) any failure to nominate the Employee for election to the Board of Directors of the Company and continue the Employee as an executive officer of the Company, (iv) causing or requiring the Employee to report to anyone other than the President or Chief Executive Officer and Board of Directors of the Company, or (v) the reduction of the Employee's salary below the Floor Amount per year without the written consent of the Employee. (e) Change of Control. (i) As used in this Agreement, the term "Change of Control" shall mean: (A) Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company shareholders, was approved by a vote of at least a majority of the directors then comprising the 9 Incumbent Board shall be considered as though such individual was a member of the Incumbent Board, but excluding, for this purpose, any individual whose initial assumption of such directorship occurs as a result of either an actual or threatened election contest (as such terms are used in Section 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Exchange Act")) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, entity or group other than the Board; (B) The acquisition by an individual, entity or group (within the means of Section 13(d)(3) or 14(d)(2) of the Exchange Act) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, of Beneficial Ownership (as defined in that certain Shareholder Protection Rights Agreement dated as of December 20, 1996 between the Company and SunTrust Bank, as such agreement may be modified or amended from time to time (the "Rights Agreement")) of 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the outstanding voting securities of the Company entitled to vote generally in the election of directors unless the Incumbent Board in good faith determines in writing that such transaction shall not constitute a "Change of Control" hereunder; (C) If there occurs any merger or consolidation of the Company with or into any other corporation or entity (other than a wholly-owned subsidiary of the Company) unless the Incumbent Board in good faith determines in writing that such transaction shall not constitute a "Change of Control" hereunder; or (D) There occurs a sale or disposition by the Company of all or substantially all of the Company's assets. 10 Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in the Employee, or a group of persons which includes the Employee, acquiring directly or indirectly all or substantially of the assets of the Company. (ii) In the event of any termination of Employee's employment with the Company (including, without limitation, a termination by Employee under Section 8(d) without Good Reason) occurring within six (6) months following the occurrence of any event constituting a Change of Control other than a termination of employment occurring as a result of a termination under Subsections (a) or (b) of this Section 8 (being a termination for death or disability or a termination by the Company for Cause), the Company shall pay to the Employee the sum of the following: (A) The Employee's base salary through the date of termination at the rate in effect just prior to the date of termination of employment, plus any benefits or awards (including both the cash and stock component) which pursuant to the terms of any compensation plans have been earned or become payable (including, without limitation, any portion of any bonus award for which any performance conditions, other than continued employment, have been satisfied), but which have not yet been paid to the Employee (including, without limitation, amounts which previously had been deferred at the Employee's request); and (B) A lump sum payment in cash in an amount equal to the product of three multiplied by the largest of the following: (x) the Employee's salary and Annual Performance Bonus for the second year immediately preceding the date of termination, (y) the Employee's salary and Annual Performance Bonus for the first year immediately preceding the date of termination, or (z) the Employee's current year annual salary and annualized Annual Performance Bonus 11 (annualizing the bonus based upon an extrapolation of any portion of the bonus amount for which the applicable performance conditions, other than continued employment, have been satisfied). (iii) If Employee's employment is terminated within the scope of Subsection (e)(ii) of this Section, then the Company shall maintain in full force and effect, at the sole cost of the Company, for the continued benefit of the Employee and his or her dependents for a period terminating on the earlier of (A) the latter of the unexpired portion of the current term of this Agreement or twelve months after such date of termination or (B) the commencement date of equivalent benefits from a new employer, each of the Company's health, dental, $250,000 term life and disability insurance benefits (provided that, to the extent such benefits are not available, the Company shall provide replacement benefits on terms which, as nearly as may be practicable, are as favorable to the Employee as the discontinued benefits except that life and disability benefits need be provided only if the Employee remains insurable at standard rates) or, at the election of the Employee, the Company shall pay to the Employee a lump sum cash payment equal to the present value (using a 10% discount rate) of the cost to the Company of sponsoring such Company benefits (for which purposes the cost of sponsoring such Company benefits shall be assumed to equal the premiums payable for such benefits at the rate in effect just prior to the date of termination of employment) for the Employee and his or her dependents. (iv) If the Company or the Company's accountants determine that the payments called for under this Agreement either alone or in conjunction with any other payments or benefits made available to the Employee by the Company or an affiliate of the Company will result in the Employee being subject to an excise tax ("Excise Tax") under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or if an Excise Tax is assessed against the 12 Employee as a result of such payment or other benefits, the Company shall make a Gross-Up Payment (as defined in this subsection (iv)) to or on behalf of the Employee as and when such determination(s) and assessment(s), as appropriate, are made, subject to the conditions of this subsection (iv). A "Gross-Up Payment" shall mean a payment to or on behalf of the Employee that shall be sufficient to pay (A) any Excise Tax in full, (B) any federal, state and local income tax and Social Security or other employment tax on the payment made to pay such Excise Tax as well as any additional Excise Tax on the Gross-Up Payment, and (C) any interest or penalties assessed by the Internal Revenue Service on the Employee if such interest or penalties are attributable to the Company's failure to comply with its obligations under this subsection (iv) or applicable law. Any determination under this subsection (iv) by the Company or the Company's accountants shall be made in accordance with Section 280G of the Code, any applicable related regulations (whether proposed, temporary or final), any related Internal Revenue Service rulings and any related case law, and shall assume that the Employee shall pay Federal income taxes at the highest marginal rate in effect for the year in which the Gross-Up Payment is made and state and local income taxes at the highest marginal rate in effect in the state of the Employee's residence for such year. The Employee shall take such action (other than waiving Employee's right to any payments or benefits) as the Company reasonably requests under the circumstances to mitigate or challenge such tax. If the Company reasonably requests that the Employee take action to mitigate or challenge, or to mitigate and challenge, any such tax or assessment and the Employee complies with such request, the Company shall provide the Employee with such information and such expert advice and assistance from the Company's accountants, lawyers and other advisors as the Employee may reasonably request and shall pay for all expenses incurred in effecting such compliance and any related fines, penalties, interest and other assessments. Subject to the 13 provisions of this subsection (iv), all determinations required to be made under this subsection (iv), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within thirty (30) business days of the receipt of notice from the Company or the Employee that there has been a payment that could trigger a Gross-Up Payment, or such earlier time as is requested by the Company (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Employee may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-Up Payment under this subsection (iv) with respect to any payments shall be made no later than sixty (60) days following such payments. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on the Employee's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") or Gross-Up 14 Payments are made by the Company which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that the Employee thereafter is required to make payment of any additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of the Employee. In the event the amount of the Gross-Up Payment exceeds the amount necessary to reimburse the Employee for his Excise Tax as herein set forth, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by the Employee to or for the benefit of the Company. The Employee shall cooperate, to the extent the Employee's expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. 9. Protective Covenants; Remedies. (a) Property Rights. The Employee acknowledges and agrees that all records of the accounts of customers, lists, prospect lists, prospect reports, vendor lists, samples, desk calendars, briefcases, day timers, notebooks, computers, computer records and software, policy and procedure manuals, price lists, catalogs, premises keys, written methods of pricing, lists of needs and requirements of customers, written methods of operation of the Company or any subsidiary or affiliate of the Company (collectively, the "Company Group"), manufacturing techniques, financial records and any other records and books relating in any manner whatsoever to the customers of the Company Group or its business, whether prepared by the Employee or otherwise coming into the 15 Employee's possession, are the exclusive property of the Company Group regardless of who actually purchased or prepared the original book, record, list or other property. All such books, records, lists or other property shall be immediately returned by the Employee to the Company upon any termination of employment. (b) Non-Disclosure of Confidential Information. The Employee acknowledges that through his employment by the Company, the Employee will become familiar with, among other things, the following: Any scientific or technical information, design, process, procedure, formula or improvement that is secret and of value, and information including, but not limited to, technical or nontechnical data, formula, patterns, compilations, programs, devices, methods, techniques, drawings and processes, and product, customer and financial data, which the Company takes reasonable efforts to protect from disclosure, and from which the Company derives actual or potential economic value due to its confidential nature (the foregoing being hereinafter collectively referred to as the "Confidential Information"). The Employee acknowledges that use or disclosure of such Confidential Information would be injurious to the Company and will give the Employee an unfair competitive advantage over the Company Group in the event that the Employee should go into competition with the Company Group. Accordingly, the Employee agrees that during the term of this Agreement and for a period of two (2) years subsequent to the termination of employment for any reason, the Employee will not disclose to any person, or utilize for the Employee's benefit, any of the Confidential Information. The Employee acknowledges that such Confidential Information is of special and peculiar value to the Company; is the property of the Company Group, the product of years of experience and trial and error; is not generally known to the Company Group's competitors; and is regularly used in the operation of the Company Group's business. The Employee 16 acknowledges and recognizes that applicable law prohibits disclosure of confidential information and trade secrets indefinitely (i.e., without regard to the two year period described in this paragraph), and the Company has the right to require the Employee to comply with such law in addition to the Company's rights under this paragraph. (c) Non-Interference With Employees. The Employee agrees not to solicit, entice or otherwise induce any employee of the Company Group to leave the employ of the Company Group for any reason whatsoever, and not to otherwise interfere with any contractual or business relationship between the Company Group and any of its employees for two (2) years from the termination of the Employee's employment. (d) Non-Solicitation of Customers. For so long as the Employee shall be due or shall have accrued salary payments from the Company (including, without limitation any such payment under Subsections (c) or (d) of Section 8 of this Agreement which Employee does not waive and refund to the Company in advance of taking any actions prohibited by this Subsection), and, in the event of any termination of Employee's employment hereunder by the Company for Cause or by the Employee without Good Reason, for one (1) year after the date of such termination of employment, the Employee agrees that the Employee will not, within the world (the "Territory"), which the parties agree is the territory from which the Employee shall primarily renders services, for the Employee's own benefit or on behalf of any other person, partnership, company or corporation, contact any customer or customers of the Company Group who the Employee called upon or with which the Employee became familiar while employed by the Company, for the purpose of engaging in the Business. This Subsection shall apply for one year following the date of any termination of employment within the scope of Subsection (e)(ii) of Section 8 of this Agreement. 17 (e) Non-Competition. For so long as the Employee shall be due or shall have accrued salary payments from the Company (including, without limitation any payment under Subsections (c) or (d) of Section 8 of this Agreement which Employee does not waive and refund to the Company in advance of taking any action prohibited by this Subsection), and in the event of any termination of Employee's employment hereunder by the Company for Cause or by the Employee without Good Reason, for one (1) year after the date of such termination of employment, the Employee agrees that the Employee will not (i) within the Territory, either directly or indirectly, whether on his own behalf or in the service of others (whether as an employee, director, consultant or advisor) in any capacity that involves duties similar to the duties of the Employee hereunder, engage in the Business, or (ii) become an owner (except for the ownership of not greater than an interest of five percent of a publicly held company) of any company which is engaged in the Business. This Subsection shall apply for one year following the date of any termination of employment within the scope of Subsection (e)(ii) of Section 8 of this Agreement. (f) Inventions and Discoveries. The Employee agrees to fully inform and disclose to the Company all inventions, designs, improvements and discoveries which the Employee now has or may hereafter while employed by the Company obtain which either constitutes an improvement to or a modification of any of the products which from time to time are under development by the Company or being manufactured or marketed by the Company (collectively, the "Products") or constitute an invention, design, improvement or discovery having unique application to the Products, whether conceived by the Employee alone or with others during or outside the usual hours of work. All such inventions, designs, improvements and discoveries shall be the exclusive property of the Company. The Employee shall assist the Company to obtain such legal protection of all such inventions, designs, improvements and discoveries as may be deemed desirable by 18 the Company from time to time. This Subsection shall survive any expiration or earlier termination of this Agreement. (g) Acknowledgment Regarding Protective Covenants. The Employee acknowledges that the Employee has read and understands the terms of this Agreement, that the same was specifically negotiated, and that the protective covenants agreed upon herein are necessary for the protection of the Company Group's business. Further, the Employee acknowledges that the Company would not employ the Employee without the specifically negotiated protective covenants herein stated. (h) Remedies. In addition to any other rights and remedies which are available to the Company, with respect to any breach or violation of the protective covenants set forth herein, it is recognized and agreed that the Company shall be entitled to (i) obtain injunctive relief which would prohibit the Employee from continuing any breach or violation of such protective covenants, and (ii) commence an action to obtain such relief in any court of competent jurisdiction. 10. Disputes. Except as set forth in Section 9(h) of this Agreement, any controversy or claim arising out of or relating to the employment relationship between the Company and the Employee shall be settled by arbitration by the American Arbitration Association administered under its National Rules for the Resolution of Employment Disputes. Such arbitration shall be conducted in the City of Atlanta, Georgia in accordance with the rules of the American Arbitration Association. Judgment upon the award entered by the arbitrators shall be final and may be entered in a court having jurisdiction thereof. If the Employee is the prevailing party in such proceeding, then the Employee shall be entitled to recover the Employee's costs (including, without limitation, reasonable attorneys' fees) of such proceeding. If the Company is the prevailing party in such proceeding, then the arbitrator may in the arbitrator's discretion 19 award the Company its costs (including reasonable attorneys' fees) of such proceeding. 11. No Conflicting Agreements. The Employee hereby represents and warrants that the execution of this Agreement and the performance of his obligations hereunder will not breach or be in conflict with any other agreement to which he is a party or by which he is bound, and that he is not subject to any covenants against competition or similar covenants which affect the performance of his obligations hereunder. 12. Consulting Cooperation. The Employee shall cooperate fully with the Company in the defense or prosecution of any claims or actions which may be brought against or on behalf of the Company which relate to events or occurrences that transpired while the Employee was employed by the Company. The Employee's full cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of the Company at mutually convenient times. The Employee shall also cooperate fully with the Company in connection with any examination or review by any federal or state regulatory authority as any such examination or review relates to events or occurrences that transpired while the Employee was employed by the Company. The obligations under this Section shall continue, to the extent required, following the expiration of this Agreement. To the extent the Employee is required to provide services under this Section subsequent to the expiration of this Agreement, the Company shall continue to reimburse the Employee for the Employee's reasonable expenses in connection with the performance of his duties under this Section and pay a consulting fee in the amount of $100 per hour. 13. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and personally delivered or sent by registered or certified mail, return receipt requested, in the case of the Company, to the 20 principal office of the Company directed to the attention of the Company's Board of Directors, and in the case of the Employee, to the Employee's last known residence address. 14. Construction. This Agreement shall be governed and interpreted in accordance with the laws of the State of Georgia. The waiver by any party hereto of a breach of any of the provisions of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. 15. Modification; Assignment. This Agreement may not be changed except by written agreement duly executed by the parties hereto, provided that Schedule 1 of this Agreement may be modified as set forth in such Schedule. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company. This Agreement, being for the personal services of the Employee, shall not be assignable or subject to anticipation by the Employee. This Agreement shall be binding upon and inure to the benefit of the Employee, his estate and Beneficiary (as defined below). 16. Severability. Each provision of this Agreement shall be considered severable. If for any reason any provisions herein are determined to be invalid or unenforceable, this Agreement shall be construed in all respects as though such invalid or unenforceable provisions were omitted, and such invalidity or unenforceability shall not impair or otherwise affect the validity of the other provisions of this Agreement. Moreover, the parties agree to replace such invalid provision with a substitute provision that will correspond to the original intent of the parties. 17. Number of Agreements. This Agreement may be executed in any number of counterparts, each one of which shall be deemed an original. 21 18. Pronouns. The use of any word in any gender shall be deemed to include any other gender and the use of any word in the singular shall be deemed to include the plural where the context requires. 19. Headings. The section headings used in this Agreement are for convenience only and are not to be controlling with respect to the contents thereof. 20. Entire Agreement. This Agreement, together with any other written agreements entered into concurrently herewith, contains the complete and exclusive statement of the terms and conditions of the Employee's employment by the Company, and there exists no other inducement or consideration between the Company and the Employee relative to the employment contemplated by this Agreement. All prior agreements relative to the subject matter of this Agreement are terminated. 21. Beneficiary. If the Employee dies prior to receiving all of the amounts payable to him or her in accordance with the terms of this Agreement, such amounts shall be paid to one or more beneficiaries (each, a "Beneficiary") designated by Employee in writing to the Company during his lifetime, or if either no such Beneficiary is designated or such designation is known to the Company to not be binding on the Employee's estate, to Employee's estate. 22. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Employee or others. In no event shall Employee be obligated to seek other employment or take any other action to mitigate the amounts payable to Employee under any of the provisions of this Agreement, nor shall the amount of any payment hereunder be reduced by any compensation earned as result of Employee's employment by another employer, except that any continued welfare 22 benefits provided for by Sections 8(c) or 9(e)(iii) shall terminate and expire on the commencement date of equivalent benefits from a new employer. 23. Survival of Employee's Rights and Duties. All of Employee's rights hereunder, including his rights to compensation and benefits, and his obligations under Section 9 hereof, shall survive the termination of Employee's employment and/or the termination of this Agreement. 24. Legal Fees. The Company shall pay the reasonable costs (including attorneys' fees and expenses) of Employee in completing this Agreement up to $2,500. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the date first set forth above. MICROTEK MEDICAL HOLDINGS, INC. By: ------------------------------ ------------------------------------ Its: ----------------------------- 23 SCHEDULE 1 SALE OF BUSINESS BONUS PROGRAM 1. Definitions. In addition to terms defined in the Employment Agreement (the "Employment Agreement") to which this Schedule 1 is attached, the terms listed below shall be defined as follows: (a) "Allocation" shall mean a percentage amount of the Bonus Pool which shall be allocated to a designated Participant in the Bonus Pool as determined by the Committee from time to time. (b) "Bonus Pool" shall mean the total gross amount of cash available for bonus payments under this Bonus Program. The Bonus Pool shall be calculated as a percentage of the market capitalization (the product of Share Appreciation multiplied by Shares Outstanding) of the Company. The Committee may assign different percentages by range of share prices within the market capitalization. The applicable percentage(s) of the market capitalization shall be designated by the Committee from time to time. The following is an example of a Bonus Pool calculation assuming 42,000,000 Shares Outstanding, a Share Appreciation of $11.00 and percentages of bands of market capitalization designated as set forth below:
Market Capitalization (Share Bonus Share Appreciation Appreciation multiplied by 42M) Percentage Bonus Pool ------------------ ------------------------------- ---------- ---------- $0.00 to $ 1.90 $ 80,598,000.00 0.00% $ 0.00 $1.90 to $ 5.00 $130,200,000.00 3.00% $ 3,906,000.00 $5.00 to $10.00 $210,000,000.00 3.50% $ 7,350,000.00 $10.00 to $11.00 $ 42,000,000.00 4.00% $ 1,680,000.00 ------------ Total Bonus Pool $12,936,000.00 =============
(c) "Bonus Program" shall mean this Sale of Business Bonus Program. (d) "Change of Control" shall mean either (i) any merger or consolidation of the Company with or into any other corporation or entity (other than a wholly-owned subsidiary of the Company) unless the Incumbent Board (as defined in the Employment Agreement) determines that such transaction shall not constitute a "Change of Control" for purposes of this Bonus Program, or (ii) there occurs a sale or disposition by the Company of all or substantially all of the Company's assets for which purposes the Incumbent Board shall have the authority to determine in its sole discretion what constitutes substantially all of the Company's assets. (e) "Committee" shall mean the Compensation Committee of the Board of Directors or, except to the extent prohibited by applicable law or the applicable rules of any stock exchange or market, such other person or persons (who may be members of the Compensation Committee or not) to whom the Committee may expressly allocate or delegate in writing all or any portion of its 24 responsibilities and powers. Any such allocation or delegation may be revoked by the Committee at any time. (f) "Date of Termination" shall mean the date on which a Participant in this Bonus Program is no longer actively employed by the Company or any Related Company unless such date occurs due to a leave of absence approved by the Committee in which event the "Date of Termination" shall occur upon expiration of such approved leave of absence without the prior return of such Participant to such active employment status. (g) "Participant" shall mean an employee of the Company or a Related Company designated by the Committee to participate in this Bonus Program. (h) "Related Company" shall mean any subsidiary of the Company or any business venture in which the Company has a significant interest, as determined in the discretion of the Committee. (i) "Share Appreciation" shall mean the price per share of common stock of the Company at which the transaction constituting a Change of Control occurs, as determined in good faith by the Committee. (j) "Shares Outstanding" shall mean the sum of all of the Company's shares of common stock issued and outstanding immediately prior to the event constituting a Change of Control, including all such shares held by affiliated and nonaffiliated persons. 2. Adjustments. The Committee shall have authority from time to time in its discretion to terminate this Bonus Program or make such adjustments in this Bonus Program as it deems appropriate and in the best interests of the Company even if such adjustments shall result in a decrease in the amount of bonus compensation payable hereunder. For these purposes, there shall be no vested right of any Participant to any payments which may potentially arise under this Bonus Program. Without limiting the foregoing, the Committee may from time to time adjust the allocation to each Participant and the variables used in calculating the size of the Bonus Pool. 3. Expiration. Unless previously extended or terminated by action of the Committee, this Bonus Program shall expire on October 20, 2005. 4. Payment. Provided that Participant's Date of Termination has not previously occurred, concurrently with the consummation of an event constituting a Change of Control the Participant shall be entitled to payment of an amount equal to his Allocation multiplied by the Bonus Pool (the "Bonus Payment"). In the event that the consideration payable by or on behalf of an acquiring person in the transaction resulting in the Change of Control is paid in whole or in part in securities, the Bonus Payment shall be payable in a like fashion and proportion as between securities and cash. The Committee shall have absolute discretion in establishing the medium and manner of making the Bonus Payment. The Company or its successors shall immediately pay such amount to the Participant. Amounts due and unpaid shall accrue interest at twelve percent (12%) per year. 25 5. Withholding. The Company and its successors shall have the right to deduct from amounts payable hereunder all amounts required to be deducted and withheld in accordance with social security taxes and all applicable federal, state and local taxes and charges as may now be in effect or which may be hereafter enacted or required as charges on the compensation of the Participant. 6. Transferability. Interests under this Bonus Program are not transferable except that any amounts which have become payable under this Bonus Program may transfer as designated by the Participant by will or by the laws of descent and distribution. 7. Administration. The authority to manage and control the operation and the administration of this Bonus Program shall be vested in the Committee. Any interpretation of this Bonus Program by the Committee and any decision made by it with respect to this Bonus Program is final and binding on all persons. 8. Disputes. Any controversy or claim between the Company and a Participant shall be settled by arbitration in accordance with the provisions of the Participant's Employment Agreement with the Company. 9. Not an Employment Contract. This Bonus Program does not confer on any Participant any right with respect to continuance of employment or other service with the Company or any Related Company, nor will it interfere in any way with any right of the Company or any Related Company or otherwise to terminate or modify the terms of such Participant's employment or other service at any time. 10. Construction. This Agreement shall be governed and interpreted in accordance with the laws of the State of Georgia. 26 1470890v5 EX-10.3 5 microtek10q93002ex103.txt CONSULTING AGREEMENT EXHIBIT 10.3 CONSULTING AGREEMENT THIS AGREEMENT is made and entered into on August ____, 2002, to be effective as of July 1, 2002, by and between MICROTEK MEDICAL HOLDINGS, INC., a Georgia corporation ("Microtek"), and GENE R. McGREVIN, a Georgia resident ("McGrevin"). In consideration of the mutual covenants contained herein, Microtek and McGrevin agree as follows: 1. Engagement. Microtek engages McGrevin as an independent contractor of Microtek to consult on special projects as may from time to time be assigned to McGrevin by the President of Microtek. McGrevin accepts such appointment and agrees to assist Microtek faithfully and diligently to achieve its business objectives as may from time to time be requested by Microtek's President, and McGrevin shall take no action which will be contrary to such objectives. 2. Term. This Agreement and McGrevin's employment hereunder shall commence on the date hereof and, unless earlier terminated in accordance with Section 5 hereof, shall continue through June 30, 2003. Microtek and McGrevin may mutually agree in their respective discretion to continue this Agreement beyond June 30, 2003. 3. Compensation. As full compensation for all services rendered by McGrevin pursuant to this Agreement, McGrevin shall receive from Microtek during his engagement under this Agreement a fee at the rate of $75,000 per year. Such fee shall be payable in accordance with the customary practices of Microtek but not less frequently than monthly. Such fee shall be in lieu of any other cash compensation payable to directors of Microtek during the term of this Agreement. 4. Business Expenses. Microtek shall reimburse McGrevin for all reasonable travel and other business expenses incurred by him in the performance of his duties and responsibilities, subject to such reasonable requirements with respect to substantiation and documentation as may be specified by Microtek. 5. Termination. McGrevin's engagement shall automatically terminate in the event of McGrevin's death. In addition, either Microtek or McGrevin may terminate McGrevin's engagement at any time with or without cause. 6. Non-Disclosure of Confidential Information. McGrevin acknowledges that, though his association with Microtek and Microtek's affiliated companies (collectively, the "Company Group"), he will become familiar with, among other things, the following: Any scientific or technical information, design, process, procedure, formula or improvement that is secret and of value, and information including, but not limited to, technical or nontechnical data, formula, patterns, compilations, programs, devices, methods, techniques, drawings, processes and financial data, which the Company Group takes reasonable efforts to protect from disclosure, and from which the Company Group derives actual or potential economic value due to its confidential nature (the foregoing being hereinafter 1 collectively referred to as the "Confidential Information"). McGrevin acknowledges that use of such Confidential Information will give McGrevin unfair competitive advantage over the Company Group in the event that McGrevin should go into competition with the Company Group and agrees that during the term of this Agreement and for a period of two (2) years subsequent to the termination of his association with Microtek for any reason, McGrevin will not disclose to any person, or utilize for McGrevin's benefit, any of the Confidential Information. McGrevin acknowledges that such Confidential Information is of special and peculiar value to the Company; is the property of the Company Group, the product of years of experience and trial and error; is not generally known to the Company Group's competitors; and is regularly used in the operation of the Company Group's business. McGrevin acknowledges and recognizes that applicable law prohibits disclosure of confidential information and trade secrets indefinitely (i.e., without regard to the two year period described in this paragraph), and Microtek has the right to require McGrevin to comply with such law in addition to the Microtek's rights under this paragraph. 7. Withholding. All payments made by Microtek under this Agreement shall be net of any tax required to be withheld by Microtek under applicable law. 8. Successors and Assigns. Neither Microtek nor McGrevin may make any assignment of this Agreement without the prior written consent of the other party. 9. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Georgia. 10. Amendment. This Agreement may be amended or modified only by a written agreement signed by McGrevin and a duly authorized officer of Microtek. 11. Counterparts. This Agreement may be executed in any one or more counterparts, each of which shall be deemed an original and all of which shall together constitute the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. MICROTEK MEDICAL HOLDINGS, INC. By: -------------------------------- Its: ------------------------------- ----------------------------------- Gene R. McGrevin 2 1486717v2 -----END PRIVACY-ENHANCED MESSAGE-----