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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________to________
Commission File No. 0-13251
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2421849
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
800 Prime Place, Hauppauge, New York 11788
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (631) 231-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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 the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant as of June 20, 2002 was approximately
$110,000,000. As of June 20, 2002, registrant had outstanding 9,501,766 shares
of Common Stock.
Parts of the following documents are incorporated by reference to Parts I, II,
III and IV of this Form 10-K Report: (1) Proxy Statement for registrant's 2002
Annual Meeting of Stockholders and (2) registrant's Annual Report to
Stockholders for the fiscal year ended March 31, 2002.
================================================================================
PART I
ITEM ONE - BUSINESS
Medical Action Industries Inc. (the "Company" or "Medical Action")
develops, manufactures, markets and distributes a variety of disposable surgical
related products. Medical Action is a leading manufacturer and distributor of
sterile disposable laparotomy sponges and operating room towels in the United
States. Through its existing direct sales force, manufacturers' representatives
and internal sales department, the Company's products are sold throughout the
United States and certain international markets, and is expanding its end-user
base to include physician, dental and veterinary offices. Medical Action has
entered into preferred vendor agreements with national distributors, as well as
sole source and/or committed contracts with nearly every major group purchasing
alliance. The Company intends to utilize these sales channels to expand its
product lines to include both surgical and non-surgical products.
During the past several years, the Company has had an active
acquisition program and has completed seven transactions since 1994. In August
1994, the Company acquired the disposable surgical products business of
QuanTech, Inc. The acquired QuanTech products include a proprietary surgical
light handle cover, uniquely designed and patented, which is used as a sterile
barrier on surgical light handles in the operating room. The QuanTech line also
produces and markets needle counters, instrument pouches, magnetic instrument
drapes, and related products used primarily in the operating room environment.
In January 1996, the Company acquired certain assets relating to the
sterilization packaging, monitoring and contamination control products business
of Lawson Mardon Medical Products, Inc. ("Lawson Mardon" or "SBW"). The primary
products acquired from Lawson Mardon include sterility packaging, a line of
sterilization indicators and integrators and such ancillary products as
infectious waste bags, laboratory specimen bags and sterility maintenance
covers. These products are used in hospital central supply, operating rooms and
in physicians' offices.
In October 1997, the Company acquired substantially all of the assets
relating to the specialty packaging business of Dayhill Corporation ("Dayhill").
The acquired Dayhill products principally consist of collection systems for the
containment and transport of biohazardous waste, including biohazard bags,
autoclave bags, laboratory transport bags, zip lock bags and sponge counting
bags.
In January 1998, the Company acquired the sponge counter product lines
of Sage Products, Inc., which included a uniquely designed and patented surgical
sponge counting system, SAFE-T-Count(TM), as well as a counting system known as
Pocket Count(TM).
In March 1999, the Company acquired the medical products division of
Acme United Corporation. Acme Healthcare, one of the first companies to design
and sell disposable instrument kits and trays, is principally comprised of three
product categories - (i) kit and tray products, including suture removal trays,
I.V. start kits, and central line trays; (ii) net, padding, wound care and
antiseptic products, including Acu-Dyne(R), an anti-microbial solution of
povidone iodine which comes in various packages and applicators, and a line of
proprietary Tubegauze(R) elastic netting used in dressing retention; and (iii)
instrument packs, which include a broad line of sterile instruments, such as
hemostats, scalpels, forceps and needle holders.
In November 2001, the Company acquired the business related to sterile
kits for the insertion of intravenous catheters ("I.V. Start Kits") and sterile
procedure trays containing components necessary for the maintenance of large
catheters inserted into the chest cavity ("Central Line Dressing Trays") from
Medi-Flex Hospital Products, Inc.
The Company focuses its resources on entering new markets for its
existing product
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lines, including alternate care, physician, veterinary and dental markets;
accelerate the internal development of new products for its existing markets and
pursuit of acquisitions which include products that complement existing product
lines for utilization of the Company's extensive sales and distribution
channels; the introduction of its products into the international marketplace;
and to increase productivity by maximizing the utilization of its existing
facilities.
The products presently manufactured and/or marketed by the Company
include:
Disposable Laparotomy Sponges - Laparotomy sponges are designed
primarily for use during surgical procedures in hospitals and health facilities.
They are single use (disposable) and made of gauze and sold in varying sizes and
utilized for a multitude of purposes. Laparotomy sponges cover exposed internal
organs, isolating them from the part of the body being operated upon. They also
absorb blood and act as a buffer between medical instruments and the skin,
thereby reducing trauma to skin tissue caused by the medical instrument.
Laparotomy sponges are sold in sterile packaging or as a non-sterile component
to be used with other health care companies' products, primarily surgical
pre-packaged procedure trays. The Company's laparotomy sponges contain an x-ray
detectable element and loop handle in order to facilitate easy counting and
identification in the operating room. For the fiscal years ended March 31, 2002,
2001, and 2000, laparotomy sponges accounted for 23%, 27% and 29%, respectively,
of the Company's total sales.
Absorbent Operating Room Towels - The Company's line of cotton
absorbent operating room towels are used during surgery for drying hands, rolled
up for propping instruments, on back tables and mayo stands for absorbing
fluids, around the incision site for absorbing blood and to allow the surgeon to
clip tubing and instruments close to the surgical site during the surgical
procedure. Operating room towels are sold in sterile packaging for single
(disposable) use and as a non-sterile component to be used with other health
care companies' products, primarily surgical pre-packaged procedure trays. For
the fiscal years ended March 31, 2002, 2001 and 2000, operating room towels
accounted for 29%, 29% and 29%, respectively, of the Company's total sales.
Gauze Sponges - Gauze sponges are used in the operating room as well as
throughout the hospital. They are also used extensively throughout the alternate
care market, including physicians' offices, health clinics, dentists' offices
and in veterinary practices. The Company also introduced gauze fluffs, which are
pre-folded gauze sponges used for compression and absorption of blood and other
fluids.
Burn Dressings - As an extension of its product line, the Company
introduced dry burn and non-adherent gauze dressings. The dry burn dressing is
composed of multiple layers of folded gauze that are typically customized for
individual hospitals as to size, weave, folds, and stitching. The non-adherent
dressings reduce sticking and skin removal during dressing changes, thereby
alleviating trauma and pain to the wound site.
Specialty Sponges - The Company's line of specialty sponges is an
extension to its laparotomy sponges. The Company's specialty sponges are used
invasively in a variety of surgical procedures and are manufactured for a
multitude of purposes and classified as follows:
(a) Dissecting Sponges - primarily utilized in surgical procedures
to separate tissue as opposed to cutting, thereby reducing bleeding and trauma
to the organ. The Company's dissecting sponges are produced in three specific
types of sponges.
(i) Peanut Sponge - a small, firm gauze sponge for dissecting and
delicate sponging. The peanut sponge is carefully folded to encompass an x-ray
element and is manufactured to allow the surgeon to adjust firmness for specific
application.
(ii) Kittner Dissector - a very firm, blunt dissector made of
ravel free abdominal tape,
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which is hand stitched to firmly lock in an x-ray element and to ensure the
sponge integrity.
(iii) Cherry Dissector - a round, soft dissector sponge
constructed from cotton for blunt dissection. A small hole facilitates easy
grasping with hemostatic forceps.
(b) Tonsil Sponges - a round, fiber filled gauze constructed with a
strong abdominal tape string sewn into the sponge to anchor the sponge when used
in hard to retrieve places.
(c) Stick Sponges - a round, fiber filled gauze sponge used for deep
sponging or prepping.
(d) Eye Spears - a cellulose fiber tip utilized during eye surgery,
constructed with a memory-free plastic handle in order to bend to any angle the
surgeon desires. The eye spear absorbs 10 times its weight in fluid.
Endoscopic Specialty Sponges - As an extension of its line of specialty
sponges, the Company introduced endoscopic specialty sponges. Endoscopic
specialty sponges are used in less invasive surgical procedures. The Company's
endoscopic specialty sponges, all of which are dissecting sponges, are made of
100% cotton affixed to a fiberglass stick and classified as follows:
(a) Endoscopic Kittner - a very firm, blunt dissecting sponge made of a
ravel-free abdominal tape, which is hand stitched to lock in an x-ray
element and securely affixed to a fiberglass stick with orthopedic glue
to ensure the sponge integrity.
(b) Endoscopic Cherry/Bullet - the names refer to the shape of the
sponges. Both are soft, blunt dissecting sponges made of spun cotton,
securely affixed to a fiberglass stick with orthopedic glue to ensure
the sponge integrity.
Disposable Surgical Light Handle Covers - Light ShieldsTM - A patented
design assures a secure fit and acts as a sterile barrier on surgical light
handles in the operating room. Light ShieldsTM are manufactured of a heavy gauge
flexible plastic for the optimum assurance of a sterile barrier.
Needle Counters - Red plastic boxes manufactured from medical grade
materials designed to resist breakage and punctures. They are produced with a
variety of designs, including surgical grade magnets in order to facilitate
sharps disposal, foam blocks and foam strips with varying count capacity and
designs.
Surgical Marking Pens - Specifically designed so that the pen barrel
fits comfortably in the surgeon's hand and is made with gentian violet color
ink. All pen barrels are embossed with a 5 cm. ruler and may also include a 15
cm. coated ruler and blank labels.
Convenience Kits - The Company offers its customers the ability to
purchase multiple products packaged with its needle counters. The Company has
the flexibility to package many different kits to individualize a hospital's
requirements.
Medical Pouches - Used to house instruments during the sterilization
process and maintain sterility of the instrument until it is needed. The pouches
are primarily used in hospital central supply, operating rooms and in
physicians' and dentists' offices as well as in any environment where sterile
instruments are needed. There are three different styles of pouches available -
self seal, heat seal and rolls. The self seal is already sealed on three sides
and includes a peel back adhesive strip on the bottom of the package, which when
folded over will seal the package. The second type is heat seal, which is also
sealed on three sides but needs a heat sealer to seal the fourth side. The
Company also markets a roll product, where the user could pull as long a pouch
as needed. This requires both ends to be sealed.
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Infectious Waste Bags - Used to collect, store and transport
biohazardous and infectious waste. The bags come in a variety of sizes, and are
red with the international biohazard symbol clearly marked on the bag. The bags
are made of high quality resins with reinforced seals for puncture resistance
and to reduce the risk of leakage.
Laboratory Specimen Transport Bags - Used to collect, transport or hold
samples from patients for examination or analytical procedures. The bags feature
a separate pouch which can be used for accompanying paperwork. The pouch has a
special seal that will ensure that the paperwork does not get contaminated or
contaminate the lab specimen.
Sterility Maintenance Covers - Used to cover sterile products and
protect against dust, moisture or any other contaminants that may render the
product non-sterile. They are used to package, store, and transport while
maintaining a dust-free environment for sterile packs. Sterility maintenance
covers come in a variety of sizes and are self seal like the sterilization
pouches. Sterility maintenance covers are clear so that you can view the
contents, are strong for protection, and tear in a linear fashion for easy
access to the product.
Sponge Counter Bags - A counting system, known as Pocket Count(TM),
used in the operating room to count laparotomy sponges and gauze sponges after
use. They are clear faced opaque backed plastic bags with five large pockets
that extend vertically down. Each pocket is tacked in the center creating two
compartments. The tack can be separated to create one large pocket. The bag can
hold ten gauze sponges. When the tacks are separated, the bag will hold one
large laparotomy sponge in each of its five pockets. The bag acts as a fluid
receptacle as well as a visual count of the sponges. The Company also produces a
uniquely designed and patented sponge counting system known as SAFE-T-Count(TM).
Autoclavable Bags - Bags used for autoclaving and sterilizing
infectious waste.
Sterilization Monitoring Products - These are printed paper and
chemical devices used to measure certain necessary parameters within a
sterilization cycle.
Indicators: measure presence of ETO or steam and temperature
Integrators: a new technology that gives a better assurance
than traditional indicators that the proper
parameters of sterilization were fulfilled,
including time, temperature and moisture.
Bowie Dick Test Pack: tests for residual air left in an autoclave
from air leaks, insufficient vacuum or poor
steam quality.
These products are used inside the packaged products and pouches throughout the
hospital, clinic and doctor's office environment whenever sterilization takes
place.
Kit and Tray Products - The Company offers a proprietary One Time (R)
brand of kit and tray products, which are packaged for use in a wide variety of
minor procedures. Both procedural requirements and hospital preference determine
tray components, and most contain proprietary items such as: ACU-dyne(R), an
anti-microbial solution of povidone iodine which comes in various packages and
applicators; and the One Time(R) brand of disposable instruments and
antiseptics. Several examples of kit and tray configurations for various
procedures are as follows:
(a) Suture Removal Tray - Typically includes littauer scissors, alcohol
prep pads, metal or plastic forceps, sponges and ACU-dyne(R) prep
swabs.
5
(b) I.V. Start Kit - Typically includes a tourniquet, ACU-dyne(R)
ampule and ointment, alcohol prep pads, and a dressing.
(c) Central Line Tray - Typically includes alcohol swabs and prep pads,
ACU-dyne(R) swabs and ointment, Benzoin, a cotton-tipped applicator,
gauze tape and a dressing.
Net, Padding and Wound Care - Includes proprietary Tubegauz(R) premium
brand and SePro(R) value brand elastic nets, which are tubular bandages used for
dressing retention. This category also includes Tubegauz(R) brand tubular gauze,
which is used to bandage fingers, toes, hands, or other areas that require
wrapping to bodily contours. Padding products are used as a protective
cushioning material for sensitive areas, and are sold in styles that offer
unique characteristics such as being mold-resistant, water-repellant or designs
for improved air circulation.
Instrument Packs - Includes a broad array of needle holders, hemostats,
various procedural scissors, scalpels and forceps.
Patents and Trademarks
The Company actively pursues a policy of seeking patent protection,
both in the United States and abroad, for its proprietary technology. There can
be no assurance that the Company's patents will not be violated or that any
issued patents will provide protection that has commercial significance.
Litigation may be necessary to protect the Company's patent position. Such
litigation may be costly and time-consuming, and there can be no assurance that
the Company will be successful in such litigation. Since no single patent covers
product lines that constitute 5% or more of any sales of the Company for fiscal
2002, the Company does not believe that any violation of any patents owned by
the Company would have a material adverse effect on it or its business
prospects.
The Company owns several patents and trademarks. While it considers
that in the aggregate the patents and trademarks are important in the operation
of its business, it does not consider that any of them, or any group of them,
are of such importance that termination would materially affect its business.
Although there is no assurance that other companies will not be
successful in developing similar products without violating the rights of the
Company, management does not believe that the invalidation of any patents owned
by the Company would have a material adverse effect on it or its business
prospects. While the protection of patents is important to the Company's
business, management does not believe any one patent is essential to the success
of the Company.
Competition
There are many companies, both public and private, engaged in the
development and marketing of disposable sterile and non-sterile surgical
supplies, including laparotomy sponges. The Company is subject to various levels
of competition based upon performance, quality and pricing. The Company's major
competitors include large manufacturers, which have greater financial resources
than the Company. The competitors differ based upon the products being sold. In
the sale of sterile laparotomy sponges, where Allegiance Healthcare Corporation,
a subsidiary of Cardinal Health, Inc., the Kendall Company, a subsidiary of Tyco
Industries, Inc. and Medline Industries, Inc. are competitors, Medical Action's
sales represent a significant share of the domestic market. The Company's
primary competitors in the sale of sterile operating room towels, in which the
Company is also the leading supplier in the domestic market, are Allegiance
Healthcare Corporation, a Subsidiary of Cardinal Health, Inc., Medline
Industries, Inc. and DeRoyal, Inc. In the sale of medical pouches to the
hospital market, where the Company is one of the leading suppliers, the
Company's primary competitors include Tower Medical, a subsidiary of Rexam, PLC.
In the sale of QuanTech products, where the Company's portion of the market is
relatively insignificant, the
6
Company's primary competitor is Devon Industries, Inc., a subsidiary of Tyco
Industries, Inc.
Healthcare Reform
In recent years, several comprehensive healthcare reform proposals were
introduced in the U.S. Congress. The intent of the proposals was, generally, to
expand healthcare coverage for the uninsured and reduce the growth of total
healthcare expenditures. While none of the proposals were adopted, healthcare
reform may again, be addressed by the current U.S. Congress. While the Company
cannot predict whether any healthcare reform legislation will be approved or
what effect, if any, that such healthcare reform legislation will have on the
Company or its operations, the Company believes that based on the intent of such
proposals, healthcare legislation may have some beneficial effects on its
business by increasing the availability of healthcare.
Regulation
As a manufacturer of medical devices, the Company is subject to
regulation by, among other governmental entities, the U.S. Food and Drug
Administration ("FDA") and the corresponding agencies of the states and foreign
countries in which the Company sells its products. These regulations govern the
introduction of new medical devices, the observance of certain standards with
respect to the manufacture, testing and labeling of such devices, the
maintenance of certain records, the tracking of devices and other matters. All
medical devices are required to be registered with the FDA. The Company must
update its establishment and listing information on an annual basis.
Pursuant to the Food, Drug and Cosmetic Act ("FDC Act"), medical
devices intended for human use are classified into three categories, Classes I,
II and III, on the basis of the controls deemed necessary by the FDA to
reasonably assure their safety and effectiveness. Class I devices are subject to
general controls (for example, labeling, premarket notification and adherence to
good manufacturing practice regulations) and Class II devices are subject to
general and special controls (for example, performance standards, post-market
surveillance, patient registries and FDA guidelines). Generally, Class III
devices are those which must receive premarket approval ("PMA") from the FDA to
ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices. Class I devices,
unless exempt, and Class II devices require premarket notification clearance
pursuant to Section 510(k) of the FDC Act. Class III devices are required to
have a PMA. A 510(k) premarket notification clearance indicates that the FDA
agrees with an applicant's determination that the product for which clearance
has been sought is substantially equivalent to another medical device that has
been previously marketed. To date, all of the Company's products have received
510(k) clearances or are exempt from the 510(k) clearance process.
In addition to requiring clearance or approval for new products, the
FDA may require clearance or approval prior to marketing products that are
modifications of existing products. The FDC Act provides that new 510(k)
clearances are required when, among other things, there is a major change or
modification in the intended use of the device or a change or modification to a
legally marketed device that could significantly affect its safety or
effectiveness. A manufacturer is expected to make the initial determination as
to whether a proposed change to a cleared device or to its intended use is of a
kind that would necessitate the filing of a new 510(k) notification.
The Company is also required to register with the FDA as a device
manufacturer and to comply with the FDA's Good Manufacturing Practices under the
Quality System Regulations ("GMP/QSR"). These regulations require that the
Company manufacture its products and maintain its records in a prescribed manner
with respect to manufacturing, testing and control activities. The Company's
manufacturing, quality control and quality assurance procedures and documents
are
7
inspected and evaluated periodically by the FDA.
The European Union has promulgated rules, under the Medical Devices
Directive, or MDD, which require medical devices to bear the "CE mark". The CE
mark is an international symbol of adherence to quality assurance standards. The
Company received ISO9001/EN46001 certification for its Arden, North Carolina
manufacturing facility and has instituted all the systems necessary to meet the
Medical Device Directive, thus acquiring the ability to affix the CE mark to
certain products.
Sales, Marketing and Customers
The Company's products are presently marketed and sold primarily to
acute care facilities throughout the United States through a network of direct
sales personnel and manufacturers' representatives. In addition, the Company is
expanding its target markets to include physician, dental and veterinary
offices. There are approximately 29 direct sales personnel and 3 manufacturers'
representatives throughout the United States engaged in the sales and marketing
of the Company's products. Sales are primarily made to independent distributors,
who maintain sufficient inventory to service customer requirements. The
Company's distribution network is comprised of hospital distributors, alternate
care distributors, physician distributors, veterinary distributors, dental
distributors and industrial safety distributors covering the entire United
States and certain international marketplaces. The Company's products are
typically purchased pursuant to purchase orders or supply agreements in which
the purchaser specifies whether such products are to be supplied through a
distributor or directly by the Company.
Management believes that the continuing pressure to utilize low-cost,
disposable medical products has significantly expanded the use of custom
procedure trays, which contain the necessary items designed for use in specific
procedures by surgical teams. Many of the custom tray suppliers are vertically
integrating the packaging process by buying bulk, non-sterile operating room
towels, laparotomy sponges and other products manufactured by the Company to
place in these custom trays. The trays are then sterilized, saving valuable
nursing time and the costs associated with individual product packaging.
In addition to private and public hospitals and health facilities,
customers for the Company's products include group purchasing organizations and
investor-owned hospital chains. With the emergence of these cooperative buying
groups and chains as major purchasers of medical/surgical products, a
significant portion of the Company's sales are dependent upon its ability to
provide its products throughout a wide geographical area and to service
substantially all members of the group or chain. The Company's present
distributor-oriented marketing network has enabled it to become a selected
source for many of the cooperative buying groups and chains. The Company records
sales upon the shipment of inventory to the distributor, at which time title
passes to the distributor. Pricing to its ultimate customer under these supply
agreements is usually established for the contract period, which will typically
be from one to three years. The Company views its ultimate customers as the
medical professionals who use its products, rather than the distributors.
No individual customer or affiliated group of customer accounts
accounted for more than 10% of the Company's net sales in any of the past three
fiscal years. Nevertheless, sales to Owens & Minor, Inc., Allegiance Healthcare
Corporation and McKesson General Medical, diversified distribution companies
(the "Distributors") accounted for approximately 33%, 28% and 10%, respectively,
for the fiscal year ended March 31, 2002, 31%, 23% and 12% of net sales,
respectively, for the fiscal year ended March 31, 2001 and 27%, 24% and 11%,
respectively for the fiscal year ended March 31, 2000. Although the Distributors
may be deemed in a technical sense to be major purchasers of the Company's
products, the Distributors typically serve as a distributor under a purchase
order or supply agreement between the customer and the Company and does not
purchase for its own account. The Company, therefore, does not believe it is
appropriate to categorize the Distributors as actual customers.
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The Company believes it has established an efficient system for
marketing its products throughout the United States, and intends to utilize
these existing sales methods and channels to market new products as they are
developed or acquired.
Research and Development
Product development costs charged to income were $453,000, $457,000 and
$519,000 for the fiscal years ended March 31, 2002, 2001 and 2000, respectively.
Employees
As of June 1, 2002, the Company had 236 full-time employees with 170 in
manufacturing and distribution, 44 in marketing and sales, and 22 in
administration. None of the Company's employees are represented by a labor
union. The Company believes that its employee relations are satisfactory.
Raw Materials
The principal raw materials used by the Company are a four-ply mesh
gauze laparotomy sponge and cotton huck towel. Other materials and supplies used
by the Company include gauze, gauze sponges, injection molded and thermoformed
plastics, medical instruments, foam, medical grade magnets and a variety of
packaging material. Several of these raw materials are supplied from vendors
outside the United States. The Company presently purchases its principal cotton
raw materials primarily from the Peoples Republic of China and to a lesser
extent, India and is currently sourcing instruments from Pakistan, a portion of
its thermoform plastics from Taiwan, packaging material from the United Kingdom
and needle counters from the People's Republic of China.
The Company's operating room towels, which are imported from the
Peoples Republic of China, have been classified as a non-medical device by the
U.S. Department of Customs, and until December 31, 2001, were subject to import
quota restrictions. With the admittance of the People's Republic of China into
the World Trade Organization, the Company's operating room towels are no longer
subject to import quota restrictions.
Backlog
The Company does not believe that its backlog figures are necessarily
indicative of its business since most hospitals and health related facilities
order their products on a continuous basis and not pursuant to any contractual
arrangements. Since typical shipment times range from two to five days, the
Company must maintain sufficient inventories of all products at all times.
Manufacturing
The Company currently purchases its laparotomy sponges, burn dressings,
operating room towels and needle counters from the People's Republic of China.
During the past few years, the Company also purchased certain of these products,
to a lesser extent, from a number of different countries, including Mexico and
the Dominican Republic. After these products are manufactured, they are shipped
to the Company's manufacturing facility in Arden, North Carolina, where they are
packaged.
The Company's QuanTech products, medical pouches and Acme Healthcare
products are predominantly manufactured and/or assembled in the Company's Arden,
North Carolina manufacturing facility. Some of the medical and surgical
specialty products sold by the Company are purchased from other manufacturers,
which the Company believes are readily available from a variety of manufacturers
and suppliers.
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ITEM TWO - PROPERTIES
The Company owns a 205,000 square foot manufacturing, warehouse and
distribution facility located on approximately 32 acres in Arden, North Carolina
and a 12,000 square foot general office building on approximately 1.4 acres in
Hauppauge, New York. Management believes that the Company's facilities are
adequate to meet its current needs and should continue to be adequate for the
foreseeable future. Set forth below is a summary of the facilities owned or
leased by the Company.
Location Primary Use Square Feet
- -------- ----------- -----------
Arden, North Carolina Manufacturing/Warehouse/Distribution 205,000 (a)
Hauppauge, New York Executive Offices 12,000 (b)
- -------------------------
(a) The principal manufacturing, distribution and warehouse facility of the
Company is located on premises, which the Company owns in Arden, North
Carolina. An Industrial Revenue Bond in the amount of $4,240,000 was
outstanding as of March 31, 2002, which was used to acquire and
renovate the facility and acquired certain manufacturing equipment.
(b) The Hauppauge, New York corporate offices were acquired by the Company
in July 2000, no mortgage indebtedness was incurred with respect to the
premises.
ITEM THREE - LEGAL PROCEEDINGS
The Company is a party to several lawsuits arising out of the conduct
of its business in the ordinary course. While the results of such lawsuits
cannot be predicted with certainty, management does not expect that the ultimate
liabilities, if any, will have a material adverse effect on the financial
position or results of operations of the Company.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
PART II
ITEM FIVE - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is set forth in registrant's 2002
Annual Report to Stockholders under the captions "Selected Financial Data" and
"Stock Trading", which information is hereby incorporated herein by reference.
ITEM SIX - SELECTED FINANCIAL DATA
The information required by this Item is set forth in registrant's 2002
Annual Report to Stockholders contained under the caption "Selected Financial
Data", which information is hereby incorporated herein by reference.
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is set forth in registrant's 2002
Annual Report to Stockholders contained under the caption "Management's
Discussion and Analysis of Financial
10
Condition and Results of Operations", which information is hereby incorporated
herein by reference.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Company's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Report constitute forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. Statements indicating the Company
"plans", "expects", "estimates" or "believes" are forward-looking statements
that involve known and unknown risks, including the Company's future economic
performance and financial results. The forward-looking statements relate to (i)
expansion of the Company's market share, (ii) the Company's growth into new
markets, (iii) internal development of new products and product lines, and (iv)
retention of the Company's earnings for use in the operation and expansion of
its business.
Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include, but
are not limited to, the effect of economic and business conditions, the impact
of consolidation throughout the healthcare supply chain, the impact of
healthcare reform, opportunities for acquisitions, the Company's ability to
effectively integrate acquired companies, the ability of the Company to maintain
its gross profit margins, the ability to obtain additional financing to expand
the Company's business, the ability to successfully compete with the Company's
competitors that have greater financial resources, the availability and possible
increases in raw material prices for operating room towels, the impact of
current or pending legislation and regulation, as well as the risks described
from time to time in the Company's filings with the Securities and Exchange
Commission, which include its Annual Report on Form 10-K and Quarterly Reports
on From 10-Q.
The forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, express or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and that in light of the
significant uncertainties inherent in forward-looking statements, the inclusion
of such statements should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
The Company undertakes no obligation to update publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
ITEM SEVEN (A) - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in registrant's 2002
Annual Report to Stockholders contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
information is hereby incorporated herein by reference.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in registrant's 2002
Annual Report to Stockholders under the captions "Reports of Independent
Certified Public Accountants", "Balance Sheets", "Statements of Earnings",
"Statement of Shareholders' Equity", "Statements of Cash Flows" and "Notes to
Financial Statements", which information is hereby incorporated herein by
reference.
11
ITEM NINE - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III is incorporated by reference to
the Company's definitive proxy statement in connection with its Annual Meeting
of Stockholders scheduled to be held in August 2002, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended March 31, 2002.
PART IV
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1) and (2) List of Financial Statements and Financial Statement Schedules
The following financial statements of Medical Action Industries Inc.,
included in its Annual Report to Stockholders for the year ended March 31, 2002,
are incorporated by reference in Item 8:
Balance Sheets at March 31, 2002 and 2001
Statements of Earnings for the Years Ended March 31, 2002, 2001 and
2000
Statement of Shareholders Equity for the Years Ended March 31, 2002,
2001 and 2000
Statements of Cash Flows for the Years Ended March 31, 2002, 2001 and
2000
Notes to Financial Statements
The following financial statement schedule and Report of Independent
Certified Public Accountants of Medical Action Industries Inc. and
subsidiary is included in Item 14(d):
Report of Independent Certified Public Accountants on Schedule II
Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Exhibits:
Exhibit No.
2.1 Agreement and Plan of Reorganization dated as of August 12,
1994 among Registrant, QuanTech Acquisition Corp. and
QuanTech, Inc. (Exhibit 2.1 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995).
2.2 Purchase Agreement dated as of January 30, 1996 among
Registrant, SBW Acquisition Corp., Lawson Mardon Medical
Products, Inc. and Lawson Mardon Medical Products, a trading
division of Lawson Mardon Packaging UK Ltd. (Exhibit 2 to the
Company's Current Report on Form 8-K dated February 6, 1996).
12
2.3 Asset Purchase Agreement dated as of March 9, 1999 between
Acme United Corporation and Registrant (Exhibit 2 to the
Company's Current Report on Form 8-K dated April 1, 1999).
2.4 Asset Purchase Agreement dated as of October 3, 2001 between
Medi-Flex Hospital Products, Inc. and Registrant (Exhibit 2
the Company's Current Report on Form 8-K dated November 30,
2001).
3.1* Certificate of Incorporation, as amended.
3.2 By-Laws, as amended (Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988).
10.1 1996 Non-Employee Director Stock Option Plan (Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the year ended
March 31, 1997).
10.2 Restricted Management Stock Bonus Plan, as amended (Exhibit
10(b) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988).
10.3* 1989 Non-Qualified Stock Option Plan, as amended.
10.4* 1994 Stock Incentive Plan, as amended.
10.5 Employment Agreement dated as of February 1, 1993 between the
Registrant and Paul D. Meringolo (Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1993).
10.6 Modification Agreement dated as of February 5, 1996 between
the Registrant and Paul D. Meringolo (Exhibit 10 to the
Company's Current Report on Form 8-K dated February 7, 1996).
10.7 Modification Agreement dated as of May 28, 1997 between the
Registrant and Paul D. Meringolo (Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1997).
10.8 Modification Agreement dated as of July 21, 1999 between the
Registrant and Paul D. Meringolo (Exhibit 10 to the Company's
current report on Form 8-K dated July 30, 1999).
10.9 Modification Agreement dated as of May 31, 2000 between the
Registrant and Paul D. Meringolo (Exhibit 10 to the Company's
current report on Form 8-K dated June 5, 2000).
10.10 Revolving Credit Note and Agreement between the Registrant
and a lending institution dated as of March 18, 1999, as
amended.
10.11 Change in Control Agreement dated as of June 1, 1995 between
the Registrant and certain executive officers (Exhibit 10.8
to the Company's Annual Report on Form 10-K for the year
ended March 31, 1995).
23.1* Consent of Grant Thornton LLP.
99* Additional Exhibit - Undertakings
13
(b) Reports on Form 8-K:
(i) Amendment No. 1 to Current Report on Form 8-K dated January 23,
2002 re: Item 7 - Financial Statements and Exhibits
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report.
- ----------------------
With the exception of the aforementioned information incorporated by
reference in this Annual Report on Form 10-K, the Company's Annual Report to
Stockholders for the year ended March 31, 2002 is not to be deemed "filed" as
part of this report.
*Filed herewith
14
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 21st day of
June, 2002.
MEDICAL ACTION INDUSTRIES INC.
By: /s/ Paul D. Meringolo
----------------------------
Paul D. Meringolo
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on June 21, 2002 by the following persons in
the capacities indicated:
/s/ Paul D. Meringolo Chief Executive Officer, President
- ------------------------------- and Director
Paul D. Meringolo
/s/ Richard G. Satin Vice President-Operations, General Counsel,
- ------------------------------- Corporate Secretary and Director
Richard G. Satin
/s/ Bernard Wengrover Director
- -------------------------------
Bernard Wengrover
/s/ Philip F. Corso Director
- -------------------------------
Philip F. Corso
/s/ Thomas A. Nicosia Director
- -------------------------------
Thomas A. Nicosia
15
Report of Independent Certified Public Accountants on Schedule
Stockholders and Board of Directors
Medical Action Industries Inc.
In connection with our audit of the financial statements of Medical Action
Industries Inc. referred to in our report dated May 20, 2002, which is included
in the Annual Report to Shareholders and incorporated by reference in Part II of
this form, we have also audited Schedule II for each of the three years in the
period ended March 31, 2002. In our opinion, this schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Melville, New York
May 20, 2002
16
S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
MEDICAL ACTION INDUSTRIES INC.
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
---------
Additions Charged to Other
Balance at Charged Other Changes - Balance
Beginning of to Costs and Accounts - Add(Deduct) End of
Description Period Expenses Describe Describe Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $ 192,998 $ 41,000 $ 223,998
Reserve for slow moving and obsolete inventory $ 241,187 ($ 28,001) $ 213,186
Total Valuation and Qualifying Accounts $ 434,185 $ 41,000 -- ($ 28,001) $ 447,184
Year ended March 31, 2001
Deducted from asset accounts:
Allowance for doubtful accounts $ 156,998 $ 36,000 $ 192,998
Reserve for slow moving and obsolete inventory $ 134,717 $ 106,470 $ 241,187
Total Valuation and Qualifying Accounts $ 291,715 $ 142,470 -- -- $ 434,185
Year ended March 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 128,998 $ 28,000 $ 156,998
Reserve for slow moving and obsolete inventory $ 32,599 $ 102,118 $ 134,717
Total Valuation and Qualifying Accounts $ 161,597 $ 130,118 -- -- $ 291,715
- ---------
(1) Disposal and sale of slow moving and obsolete inventory.
- ------------------------------------------------------------------------------------------------------------------------------------
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED March 31, 2002
------------------
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
EXHIBIT INDEX
================================================================================
Exhibit No.
3.1 Certificate of Incorporation, as amended
10.3 1989 Non-Qualified Stock Option Plan, as amended
10.4 1994 Stock Incentive Plan, as amended
10.10 Revolving Credit Note and Agreement between the Registrant and a
lending institution dated as of March 18, 1999, as amended.
23 Consent of Grant Thornton LLP.
99 Additional Exhibit - Undertakings