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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
COMMISSION FILE NUMBER 0-13251
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2421849
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Prime Place, Hauppauge, New York 11788
(Address of Principal executive offices)
Registrant's telephone number, including area code:
(631) 231-4600
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 9,502,766 shares of
common stock as of August 7, 2002.
FORM 10-Q
CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at June 30, 2002 (Unaudited) and March 31, 2002 3-4
Statements of Earnings for the Three Months ended June 30, 2002 and 2001 (Unaudited) 5
Statements of Cash Flows for the Three Months ended June 30, 2002 and 2001 (Unaudited) 6
Notes to Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13-14
PART II - OTHER INFORMATION 15
2
MEDICAL ACTION INDUSTRIES INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
June 30, March 31,
2002 2002
------------ -----------
(Unaudited)
CURRENT ASSETS:
Cash $ 354 $ 785
Accounts receivable, less allowance for
doubtful accounts of $244 at
June 30, 2002 and $234 at March 31, 2002 9,294 7,847
Inventories, net 12,351 12,666
Prepaid expenses 609 333
Deferred income taxes 217 217
Other current assets -- 81
-------- -------
TOTAL CURRENT ASSETS: 22,825 21,929
Property, plant and equipment, net 9,731 9,691
Due from officers 382 382
Goodwill 25,149 16,553
Trademarks 596 569
Other intangible assets 336 351
Other assets 155 172
-------- -------
TOTAL ASSETS: $59,174 $49,647
======== =======
The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, March 31,
2002 2002
----------- ---------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 2,775 $ 2,434
Accrued expenses, payroll and payroll taxes 1,841 1,913
Accrued income taxes 1,015 20
Current portion of long-term debt 2,160 2,160
-------- --------
TOTAL CURRENT LIABILITIES: 7,791 6,527
Deferred income taxes 982 982
Long-term debt, less current portion 14,945 8,380
-------- --------
TOTAL LIABILITIES: 23,718 15,889
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized $.001 par value; issued and
outstanding 9,502,766 shares at June 30, 2002 and 9,496,949 shares
at March 31, 2002 10 9
Additional paid-in capital, net 10,876 11,002
Retained earnings 24,570 22,747
-------- --------
TOTAL SHAREHOLDERS' EQUITY: 35,456 33,758
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY: $ 59,174 $ 49,647
======== ========
The accompanying notes are an integral part of these financial statements.
4
MEDICAL ACTION INDUSTRIES INC.
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended
June 30,
------------------------------
2002 2001
---- ----
(Unaudited) (Unaudited)
Net Sales $22,554 $20,089
Cost of Sales 15,409 14,072
------- -------
Gross Profit 7,145 6,017
Selling, general and administrative expenses 4,167 3,755
Interest expense 50 84
Interest income 18 18
------- -------
Income before income taxes 2,946 2,196
Income tax expense 1,123 854
------- -------
Net income $ 1,823 $ 1,342
======= =======
Net income per share basic $ .19 $ .15
======= =======
Net income per share diluted $ .18 $ .14
======= =======
The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Ended June 30,
----------------------------------
2002 2001
---- ----
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net Income $ 1,823 $ 1,342
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 295 254
Provision for doubtful accounts 10 11
Deferred compensation -- 22
Changes in operating assets and liabilities net of acquisition:
Accounts receivable (1,457) (685)
Inventories 1,045 1,655
Prepaid expenses, and other current assets (195) (149)
Other assets 1 8
Accounts payable 341 (108)
Income taxes payable 1,108 575
Accrued expenses, payroll and payroll taxes (72) (149)
------- -------
Net cash provided by operating activities 2,899 2,776
------- -------
INVESTING ACTIVITIES
Acquisition of business (9,520) --
Principal payment received for loans to officers -- 1
Purchase of property and equipment (137) (84)
------- -------
Net cash used in investing activities (9,657) (83)
------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 8,955 360
Principal payments on revolving line of credit,
long-term debt and capital lease obligations (2,390) (1,886)
Repurchases of Company common stock (334) (1,333)
Proceeds from exercise of employee stock options 96 103
------- -------
Net cash provided by (used) in financing activities 6,327 (2,756)
------- -------
Decrease in cash (431) (63)
Cash at beginning of year 785 639
------- -------
Cash at end of period $ 354 $ 576
======= =======
The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP") for interim financial information and with the instructions to Form
10-Q for quarterly reports under section 13 or 15(d) of the Securities Exchange
Act of 1934. Accordingly, they do not include all of the information and
footnotes required by US GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three (3) month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended March 31,
2003. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report for the year ended March 31,
2002.
NOTE 2. INVENTORIES
Inventories, which are stated at the lower of cost (first-in, first-out) or
market, consist of the following:
June 30, March 31,
2002 2002
--------- ---------
(Unaudited)
(in thousands of dollars)
Finished Goods $ 6,313 $ 6,049
Work in Process 127 -
Raw Materials 5,911 6,617
-------- --------
Total $ 12,351 $ 12,666
======== ========
NOTE 3. NET INCOME PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding without consideration of potential common shares. Diluted
earnings per share is based on the weighted average number of common and
potential common shares outstanding. The calculation takes into account the
shares that may be issued upon exercise of stock options, reduced by the shares
that may be repurchased with the funds received from the exercise, based on the
average prices during the periods. Excluded from the calculation of earnings per
share are options and warrants to purchase 304,000 and 5,816 shares for the
three months ended June 30, 2002 and June 30, 2001,
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respectively, as their inclusion would not have been dilutive. The following
table sets forth the computation of basic and diluted earnings per share for the
three months ended June 30, 2002 and for the three months ended June 30, 2001.
Three Months Ended
June 30,
---------------------------------
2002 2001
(Unaudited) (Unaudited)
Dollars in thousands except
per share data
Numerator:
Net income for basic and dilutive earnings
per share $ 1,823 $ 1,342
=========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares 9,493,882 9,106,051
----------- ----------
Effect of dilutive securities:
Employee and director stock options 682,060 711,071
Warrants 10,681 59,973
----------- ----------
Dilutive potential common shares 692,741 771,044
----------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares 10,186,623 9,877,095
=========== ==========
Basic earnings per share $ .19 $ .15
=========== ==========
Diluted earnings per share $ .18 $ .14
=========== ==========
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NOTE 4. STOCKHOLDERS' EQUITY
For the three (3) months ended June 30, 2002, 31,250 stock options were
exercised by employees of the Company in accordance with the Company's 1989
Non-Qualified Stock Option Plan. The exercise price of the options exercised
ranged from $2.09 per share to $4.00 per share, the net cash proceeds from these
exercises were $96,094.
NOTE 5. ACQUISITION
On June 21, 2002, the Company acquired certain assets relating to the specialty
packaging and collection systems for the containment of infectious waste and
sterilization products business of MD Industries of Northbrook, Illinois ("MD
Industries"). The purchase price for the assets acquired was approximately
$9,500,000, all of which was paid at closing.
The assets acquired included inventory, certain fixed assets and trademarks used
in the operations of the specialty packaging and collection systems for the
containment of infectious waste and sterilization products (hereinafter the
"Products").
The acquisition of the MD Industries business has been accounted for as a
purchase pursuant to Statement No. 141 as issued by the Financial Accounting
Standards Board. The operations of MD Industries have been included in the
Company's statement of earnings since the acquisition date. Historical pro forma
information as if this acquisition occurred at the beginning of all periods
presented is not available. The following table summarizes the assets acquired
from MD Industries and the preliminary allocation of the purchase price:
Inventory $ 730,000
Factory and office equipment 167,000
Goodwill 8,596,000
Trademarks 27,000
----------
$9,520,000
==========
MD Industries sold its line of specialty packaging and collection systems for
the containment of infectious waste and sterilization products. The Company sold
specialty packaging and collection systems for the containment of infectious
waste and sterilization products prior to the acquisition. Essentially, the
acquisition increased the Company's market share in these products, while
gaining operational efficiencies and the benefit of increased purchasing power
and lower material costs. As a result of the acquisition, the Company has
projected approximately $7.0 million of incremental sales to its existing
customers of specialty packaging and collection systems for the containment of
infectious waste and sterilization products with limited additional selling and
general administrative expenses. The aforementioned were the primary reasons for
the acquisition and the main factors that contributed to the purchase price and
which
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resulted in the recognition of goodwill. For tax purposes, the goodwill will be
deductible.
Goodwill and the trademarks will be tested for impairment periodically, in
accordance with Statement No. 142 as issued by the Financial Accounting
Standards Board.
The Company utilized the funds available under its existing Revolving Credit
Note and Loan Agreement in order to satisfy the purchase price. The purchase
price allocation is subject to certain adjustments, none of which is anticipated
to be material, because the valuation of the assets and acquisition costs have
not been finalized.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENT
This report on Form 10-Q contains forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance and financial
results of the Company. The forward-looking statements relate to (i) the
expansion of the Company's market share, (ii) the Company's growth into new
markets, (iii) the development of new products and product lines to appeal to
the needs of the Company's customers, and (iv) the retention of the Company's
earnings for use in the operation and expansion of the Company's 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 market conditions, the impact of the
consolidation throughout the healthcare supply chain, the impact of healthcare
reform, opportunities for acquisitions and 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 failure of the Company to successfully compete with the
Company's competitors that have greater financial resources, the loss of key
management personnel or the inability of the Company to attract and retain
qualified personnel, 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
this report on Form 10-Q and the Company's annual report on Form 10-K for the
year ended March 31, 2002.
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
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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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net sales for the three months ended June 30, 2002 increased 12% to $22,554,000
from $20,089,000 for the three months ended June 30, 2001. The increase in net
sales was primarily attributed to a $3,073,000 or 59% increase in net sales of
small kits and trays, a $713,000 increase in net sales of non-woven products and
a $320,000 increase in net sales of patient aids. These increases were partially
offset by a $861,000 or 16% decrease in net sales of laparotomy sponges and a
$581,000 or 10% decrease in net sales of operating room towels. Management
believes that the increase in net sales of small kits and trays was primarily
due to net sales of approximately $2,674,000 of small kits and tray products
acquired from Medi-Flex on November 30, 2001. Net sales of non-woven products
and patient aids was primarily due to greater domestic market penetration. The
decrease in net sales of laparotomy sponges was primarily due to a correction by
international distributors of inventory levels of laparotomy sponges. The
decrease in net sales of operating room towels was primarily due to a decrease
in the average selling prices of approximately 8%.
The Company obtains a portion of its raw materials for operating room towels
from the People's Republic of China. These operating room towels were designated
as a textile, for which an export visa is required. However, with the admission
of the People's Republic of China into the World Trade Organization ("WTO"),
export visas for operating room towels are no longer required. As a result, the
Company believes that sales of the product will become more competitive and
average selling prices will decline during fiscal 2003. In addition, the Company
believes that it would be able to maintain its market share and gross margin
dollars of these products.
Gross profit for the three months ended June 30, 2002 increased 19% to
$7,145,000 from $6,017,000 for the three months ended June 30, 2001. Gross
profit as a percentage of net sales for the three months ended June 30, 2002
increased to 32% of net sales from 30% of net sales for the three months ended
June 30, 2001. The increase in gross profit dollars and gross profit percentage
was primarily attributable to the increase in net sales, a decrease in certain
raw material costs and increased manufacturing utilization at the Company's
manufacturing facility in North Carolina.
Selling, general and administrative expenses for the three months ended June 30,
2002 increased 11% to $4,167,000 from $3,755,000 for the three months ended June
30,
11
2001. As a percentage of net sales, selling, general and administrative expenses
decreased to 18% for the three months ended June 30, 2002 from 19% for the three
months ended June 30, 2001. The increase in selling, general and administrative
expense dollars was primarily attributable to increased selling expenses
associated with achieving higher sales. The increase in selling expenses
consisted primarily of increased commissions and salaries.
Interest expense for the three months ended June 30, 2002 decreased 40% to
$50,000 from $84,000 for the three months ended June 30, 2001. The decrease in
interest expense was attributable to a decrease in the average principal loan
balances and interest rates during the quarter ended June 30, 2002, as compared
to the quarter ended June 30, 2001. The decrease in the average principal loan
balances outstanding was primarily attributable to net cash provided from
operating activities from July 1, 2001 through June 30, 2002.
Net income for the three months ended June 30, 2002 increased to $1,823,000 from
$1,342,000 for the three months ended June 30, 2001. The increase in net income
is attributable to the aforementioned increase in net sales and gross profit and
decrease in interest expense, which were partially offset by an increase in
selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $15,034,000 with a current ratio of 2.9 at
June 30, 2002 as compared to working capital of $15,402,000 with a current ratio
of 3.4 at March 31, 2002. Total borrowings outstanding, including Industrial
Revenue Bonds of $4,150,000, were $17,105,000 with a debt to equity ratio of .48
at June 30, 2002 as compared to $10,540,000 with a debt to equity ratio of .31
at March 31, 2002. The increase in total borrowings outstanding at June 30, 2002
was primarily attributable to the utilization of funds under the Company's
existing credit facilities to purchase certain assets relating to the collection
systems for the containment of infectious waste and sterilization products
business of MD Industries on June 21, 2002.
The Company has financed its operations primarily through cash flow from
operations and borrowings from its existing credit facilities. At June 30, 2002
the Company had a cash balance of $354,000 compared to $785,000 at March 31,
2002.
The Company's operating activities provided cash of $2,900,000 for the three (3)
months ended June 30, 2002 as compared to $2,776,000 for the three (3) months
ended June 30, 2001. Net cash provided for the three (3) months ended June 30,
2002 consisted primarily of net income from operations, decreases in
inventories, depreciation and amortization and increases in income taxes
payable. These sources of cash more than offset the increase in accounts
receivable associated with increased sales and increases in prepaid expenses and
other current assets.
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Investing activities used net cash of $9,657,000 and $83,000 for the three (3)
months ended June 30, 2002 and June 30, 2001, respectively. The principal use
for the three (3) months ended June 30, 2002 was for the purchase of certain
assets relating to the collection systems for the containment of infectious
waste and sterilization products business of MD Industries on June 21, 2002. The
purchase price and related acquisition costs for the MD Industries business was
approximately $9,520,000.
Financing activities provided cash of $6,327,000 for the three (3) months ended
June 30, 2002 compared to $2,756,000 used for the three (3) months ended June
30, 2001. Financing activities consisted of borrowings under the Company's
existing credit facility of $8,955,000, principally to finance the acquisition
of certain assets of MD Industries, offset by principal payments of $2,390,000.
Other financing activities include cash proceeds from the exercise of stock
options of $96,000 and $334,000 used for the repurchase of the Company's common
stock.
At June 30, 2002, the Company had no material commitments for capital
expenditures.
The Company believes that the anticipated future cash flow from operations,
coupled with its cash on hand and available funds under its revolving credit
agreements, will be sufficient to meet working capital requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate change market risk with respect to its
credit facility with a financial institution which is priced based on the prime
rate of interest plus a spread of up to 1/4%, LIBOR rate plus a spread of up to
2 1/2%, or at 1 1/4% over the prevailing bankers' acceptance rate. The spread
over prime and LIBOR rates is determined based upon the Company's performance
with regard to agreed upon financial ratios. The Company decides at its sole
discretion as to whether borrowings will be at prime, LIBOR or bankers'
acceptance rates. At June 30, 2002, $12,955,000 was outstanding under the credit
facility. Changes in the prime rate, LIBOR rates or bankers' acceptance rates
during fiscal 2003 will have a positive or negative effect on the Company's
interest expense. Each 1% fluctuation in the interest rate will increase or
decrease interest expense for the Company by approximately $130,000 on an
annualized basis.
In addition, the Company is exposed to interest rate change market risk with
respect to the proceeds received from the issuance and sale by the Buncombe
County Industrial and Pollution Control Financing Authority Industrial
Development Revenue Bonds. At June 30, 2002, $4,150,000 was outstanding for
these Bonds. The Bonds bear interest at a variable rate determined weekly.
During the quarter ended June 30, 2002, the interest rate on the Bonds
approximated 1.6%. Each 1% fluctuation in interest rates will increase or
decrease interest expense on the Bonds by approximately $42,000 on an annualized
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basis.
A significant portion of the Company's raw materials are purchased from China
and to a lesser extent from India. All such purchases are transacted in U.S.
dollars. The Company's financial results, therefore, could be impacted by
factors such as changes in foreign currency, exchange rates or weak economic
conditions in foreign countries in the procurement of such raw materials. To
date, sales of the Company's products outside the United States have not been
significant.
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MEDICAL ACTION INDUSTRIES INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings against the Company
or in which any of its property is subject.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Certification Under Sarbanes-Oxley Act
Our Chief Executive Officer and Principal Financial Officer
have furnished to the SEC the certification with respect to
this Report that is required by Section 906 of the Sarbanes-
Oxley Act of 2002.
Item 6. (a) Exhibits
99 - Certification pursuant to 18 USC ss.1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated June 21,
2002 covering Item 2 - Acquisition or
Disposition of Assets; and Item 7 -
Financial Statements and Exhibits
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICAL ACTION INDUSTRIES INC.
Dated: August 8, 2002 By: /s/ Richard G. Satin
--------------------- --------------------------------
Richard G. Satin, Vice President
(Principal Financial Officer)
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