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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 SEPTEMBER 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. 9,632,516 shares of
common stock as of October 25, 2002.
FORM 10-Q
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CONTENTS
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PAGE
NO.
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PART I - FINANCIAL INFORMATION
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ITEM 1. Condensed Financial Statements
Balance Sheets at September 30, 2002 (Unaudited) and March 31, 2002 3-4
Statements of Earnings for the Three Months ended September 30, 2002 and 2001 5
(Unaudited)
Statements of Earnings for the Six Months ended September 30, 2002 and 2001 6
(Unaudited)
Statements of Cash Flows for the Six Months ended September 30, 2002 and 2001 7
(Unaudited)
Notes to Financial Statements (Unaudited) 8-11
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 12-16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 16-17
ITEM 4. Procedures and Controls 18-19
PART II - OTHER INFORMATION
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2
ITEM 1.
- ------
MEDICAL ACTION INDUSTRIES INC.
-----------------------------
BALANCE SHEETS
--------------
(DOLLARS IN THOUSANDS)
ASSETS
------
SEPTEMBER 30, MARCH 31,
2002 2002
------------- ---------
(UNAUDITED)
CURRENT ASSETS:
Cash $ 712 $ 785
Accounts receivable, less allowance for doubtful accounts of $255 at
September 30, 2002 and $234 at March 31, 2002 9,283 7,847
Inventories 13,252 12,666
Prepaid expenses 636 333
Deferred income taxes 217 217
Other current assets 44 81
------- -------
TOTAL CURRENT ASSETS: 24,144 21,929
Property, plant and equipment, net 9,876 9,691
Due from officers 382 382
Goodwill 25,185 16,553
Trademarks 596 569
Other intangible assets 322 351
Other assets 184 172
------- -------
TOTAL ASSETS: $60,689 $49,647
======= =======
The accompanying notes are an integral part of these financial statements.
3
ITEM 1.
- -------
MEDICAL ACTION INDUSTRIES INC.
-----------------------------
BALANCE SHEETS
--------------
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
SEPTEMBER 30, MARCH 31,
2002 2002
------------- ---------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $ 2,658 $ 2,434
Accrued expenses, payroll and payroll taxes 2,233 1,913
Accrued income taxes 82 20
Current portion of long-term debt 2,160 2,160
------- -------
TOTAL CURRENT LIABILITIES: 7,133 6,527
Deferred income taxes 982 982
Long-term debt, less current portion 14,565 8,380
------- -------
TOTAL LIABILITIES: 22,680 15,889
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized, $.001 par value; issued and
outstanding 9,624,766 shares at September 30, 2002 and 9,496,949 shares at
March 31, 2002 10 9
Additional paid-in capital, net 11,640 11,002
Retained earnings 26,359 22,747
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TOTAL SHAREHOLDERS' EQUITY: 38,009 33,758
------- -------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY: $ 60,689 $49,647
======== =======
The accompanying notes are an integral part of these financial statements.
4
ITEM 1.
- -------
MEDICAL ACTION INDUSTRIES INC.
------------------------------
STATEMENT OF EARNINGS
---------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------ ------------
Net sales $23,576 $20,855
Cost of sales 16,468 14,305
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Gross profit
7,108 6,550
Selling, general and administrative expenses 4,126 3,924
Interest expense 120 55
Interest (income) (18) (21)
------- -------
come before income taxes
2,880 2,592
Income tax expense 1,091 1,002
------- ------
Net income $ 1,789 $ 1,590
======= =======
Net income per common share basic $ .19 $ .17
======= =======
Net income per common share diluted $ .18 $ .16
======= =======
The accompanying notes are an integral part of these financial statements.
5
ITEM 1.
MEDICAL ACTION INDUSTRIES INC.
------------------------------
STATEMENT OF EARNINGS
---------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
2002 2001
---------- ------------
Net sales $46,130 $40,944
Cost of sales 31,877 28,377
------- -------
Gross profit 14,253 12,567
Selling, general and administrative expenses 8,293 7,679
Interest expense 170 139
Interest (income) (36) (39)
------- -------
Income before income taxes 5,826 4,788
Income tax expense 2,214 1,856
------- -------
Net income $ 3,612 $ 2,932
======= =======
Net income per common share basic $ .38 $ .32
======= =======
Net income per common share diluted $ .35 $ .29
======= =======
The accompanying notes are an integral part of these financial statements.
6
ITEM 1.
MEDICAL ACTION INDUSTRIES INC.
------------------------------
STATEMENT OF CASH FLOW
----------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 3,612 $ 2,932
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 590 509
Provision for doubtful accounts 21 21
Deferred compensation - 24
Gain on sale of property and equipment (1) -
Changes in operating assets and liabilities:
Accounts receivable (1,457) (2,022)
Inventories 120 1,271
Prepaid expense and other current assets (266) (157)
Other assets (44) 7
Accounts payable 224 435
Income taxes payable 548 852
Accrued expenses, payroll and payroll taxes 320 (68)
------- -------
Net cash provided by operating activities 3,667 3,804
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INVESTING ACTIVITIES
Acquisition of business (9,527) -
Principal payment received for loans to officers - 1
Purchase of property, plant and equipment (557) (303)
Proceeds from sale of property and equipment 6 -
------- -------
Net cash used in investing activities (10,078) (301)
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FINANCING ACTIVITIES
Proceeds from revolving line of credit and long term borrowings 10,865 775
Principal payments on revolving line of credit, long term debt, and
capital lease obligations (4,680) (3,752)
Repurchases of company common stock (334) (1,333)
Proceeds from exercise of employee stock options 487 389
------- -------
Net cash provided by (used in) financing activities 6,338 (3,921)
------- -------
Decrease in cash (73) (418)
Cash at beginning of year 785 639
------- -------
Cash at end of period $ 712 $ 221
======= =======
The accompanying notes are an integral part of these financial statements
7
ITEM 1.
- -------
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 six (6) month period ended September 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:
SEPTEMBER 30, MARCH 31,
2002 2002
------------- ---------
(unaudited)
(in thousands of dollars)
Finished Goods $5,994 $6,049
Work in Process 65 -
Raw Materials 7,193 6,617
------ ------
Total $ 13,252 $ 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 stock. 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 336,000 shares and 80,000 shares for
the three and six months ended September 30, 2002 and September 30, 2001
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 and six months ended September 30, 2002 and for the three and six months
ended September 30, 2001.
8
ITEM 1.
- -------
MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
---------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(UNAUDITED)
NOTE 3. (continued)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands except
per share data)
NUMERATOR:
- ----------
Net income for basic and
dilutive earnings per share $1,789 $1,590 $ 3,612 $2,932
====== ====== ======= ======
DENOMINATOR:
- ------------
Denominator for basic earnings
per share - weighted average shares 9,526,233 9,136,994 9,510,057 9,121,523
--------- --------- --------- ---------
Effect of dilutive securities
Employee and director stock options 651,622 1,011,166 666,841 861,119
Warrants 10,399 45,942 10,540 52,957
------ ------ ------ ------
Dilutive potential common shares 662,021 1,057,108 677,381 914,076
------- --------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted average
shares 10,188,254 10,194,102 10,187,438 10,035,599
========== ========== ========== ==========
Basic earnings per share $.19 $.17 $.38 $.32
==== ==== ==== ====
Diluted earnings per share $.18 $.16 $.35 $.29
==== ==== ==== ====
NOTE 4. STOCKHOLDERS' EQUITY
For the three and six months ended September 30, 2002, 122,000 and 153,250 stock
options were exercised by employees and directors of the Company in accordance
with the Company's 1989 Non-Qualified Stock Option Plan, the 1994 Stock
Incentive Plan, and the Company's 1996 Non-Employee Director Stock Option Plan,
respectively. 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
$391,000 for the three months ended September 30, 2002 and $487,000 for the six
months ended September 30, 2002.
9
ITEM 1.
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
$9,527,000 including acquisition costs, 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 $ 706,000
Factory and office equipment 162,000
Goodwill 8,632,000
Trademarks 27,000
----------
$9,527,000
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 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.
10
ITEM 1.
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NOTE 6. SUBSEQUENT EVENTS
On October 25, 2002, the Company acquired certain assets relating to the
BioSafety Division of Maxxim Medical, Inc. of Waltham, Massachusetts. The
BioSafety Division, which maintains a manufacturing facility in Clarksburg, West
Virginia, consists of specialty packaging and collection systems for the
containment of infectious waste and a line of sharps containment systems. The
purchase price for the assets acquired was approximately $20,500,000, of which
$19,500,000 was paid at closing. An amount of up to $1,000,000 is payable on
February 15, 2003 subject to certain performance levels of the acquired
business.
The assets acquired included inventory, the land and manufacturing facility in
Clarksburg, West Virginia, certain fixed assets, a non competition agreement, a
supply agreement and intellectual property used in the operations of the
BioSafety Division.
The acquisition of the BioSafety division of Maxxim Medical, Inc. will be
accounted for as a purchase pursuant to Statement No. 141 as issued by the
Financial Accounting Standards Board.
The Company utilized funds under the credit agreement dated as of October 21,
2002 in order to satisfy the purchase price.
On October 21, 2002 the Company entered into a credit agreement with certain
lenders and a bank acting as administration agent for the lenders. The agreement
replaces the sixth amended and restated Revolving Credit Note and Agreement
dated June 18, 2002 with its previous bank. The Credit Agreement provides for
borrowing of $40,000,000 and is divided into two types of borrowing facilities,
(i) a term loan with a principal amount of $25,000,000 which is payable in
twenty consecutive equal quarterly installments commencing on December 31, 2002.
The term note shall bear interest from inception on the unpaid principal at the
applicable interest rate. (ii) Revolving credit loans, which amounts may be
borrowed, repaid and reborrowed up to $15,000,000. The revolving credit
agreement expires on September 30, 2005. The revolving credit loans shall bear
interest from inception on the unpaid principal at the applicable interest rate.
The applicable interest rate for both the term loan and revolving credit loans
shall equal the "alternate base rate" plus the applicable margin or at the
Company's option the "LIBOR rate" plus the "applicable margin". The applicable
base rate shall mean a rate per annum equal to the greater of (a) the Prime rate
or (b) the Federal Funds effective rate in effect on such day plus 1/2 of 1%.
"Applicable Margin" shall mean with respect to LIBOR loans a range of 225 basis
points to 325 basis points, with respect to Alternate base rate loans, the
applicable margin shall range from 0 basis points to 325 basis points. The rates
for both LIBOR and Alternate base rate loans are established quarterly based
upon agreed upon financial ratios. Borrowings on the revolving credit loans is
further limited to 80% of eligible accounts receivable, and 55% of eligible
inventory, as defined, with a sublimit of $7,500,000. Borrowings under this
agreement are collateralized by all the assets of the Company, and the agreement
contains certain restrictive covenants, which, among other matters, impose
limitations with respect to the incurrence of liens, guarantees, mergers,
acquisitions, capital expenditures, specified sales of assets and prohibits the
payment of dividends. The Company is also required to maintain various financial
ratios which will be measured quarterly.
11
ITEM 1.
- -------
NOTE 7. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
SFAS Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections." This statement eliminates the current requirements that gains and
losses on debt extinguishment must be classified as extraordinary items in the
income statement. Instead, such gains and losses will be classified as
extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classifications. In
addition, SFAS NO. 145 eliminates an inconsistency in lease accounting by
requiring that modifications of capital leases that result in reclassification
as operating leases be accounted for consistent with sales-leaseback accounting
rules. The statement also contains other nonsubstantive corrections to
authoritative accounting literature. The rescission of SFAS No. 4 is effective
in fiscal years beginning after May 15, 2002. The amendment and technical
corrections are SFAS No. 13 are effective for financial statements issued on or
after May 15, 2002. Management believes that the adoption of SFAS No. 145 will
not have a material impact on its results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue No. 94-3. SFAS No. 146 requires
that the liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS No. 146 also establishes that
the liability should initially be measured and recorded at fair value.
Accordingly SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Management believes that the adoption of SFAS
No. 146 will not have a material impact on its results of operations or
financial position.
12
ITEM 2.
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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, (iv) the procurement of export visas for
raw materials for operating room towels from China, which may impact the
availability and pricing of operating room towels, and (v) 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 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 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
- ---------------------
SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 30, 2001
- ----------------------------------------------------------------
Net sales for the six months ended September 30, 2002 increased 13% to
$46,130,000 from $40,944,000 for the six months ended September 30, 2001. The
increase in net sales was primarily attributable to a $2,498,000, or 119%
increase in net sales of the collection systems/biohazardous bags, a $5,809,000
or 141% increase in net sales of small kits and trays, a $1,021,000 increase in
net sales of patient aids and a $945,000 increase in net sales of non-woven
products. These increases were partially offset by a $2,141,000 or 20% decrease
in net sales of laparotomy sponges and a $2,485,000 or 20% decrease in net sales
of operating room towels. Management believes that the increase in net sales of
the collection
13
ITEM 2.
- -------
systems/biohazardous bags product line was primarily due to net sales of
approximately $2,317,000 of collection systems/biohazardous bags products
acquired from MD Industries on June 21, 2002 and greater domestic market
penetration. Net sales of small kits and trays increased primarily due to net
sales of approximately $5,153,000 of small kit and tray products acquired from
Medi-Flex on November 30, 2001 and greater domestic market penetration. Net
sales of non-woven products and patient aids was primarily due to greater market
penetration. Unit sales of laparotomy sponges decreased by 18% and average
selling prices decreased 3%. Unit sales of operating room towels decreased 9%
and average selling prices decreased 12%. Management believes that the decrease
in unit sales of laparotomy sponges and operating room towels was primarily due
to increased competition in the domestic market.
The Company obtains a portion of its raw materials for operating room towels
from the People's Republic of China. These operating room towel were designated
as 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 will be able to maintain its gross margin dollars as a
percentage of net sales for these products.
Gross profit for the six months ended September 30, 2002 increased 13% to
$14,253,000 from $12,567,000 for the six months ended September 30, 2001. Gross
profits as a percentage of net sales for the six months ended September 30, 2002
and 2001 was 31% of net sales. The increase in gross profit dollars was
primarily attributable to the increase in net sales.
Selling, general and administrative expenses for the six months ended September
30, 2002 increased 8% to $8,293,000 from $7,679,000 for the six months ended
September 30, 2001. As a percentage of net sales, selling, general and
administrative expenses decreased to 18% for the six months ended September 30,
2002 from 19% for the six months ended September 30, 2001. The increase in
selling, general and administrative expense dollars was primarily attributable
to increased selling expenses associated with achieving higher sales and
increased administrative costs associated with the MD Industries and Medi- Flex
acquisitions.
Interest expense for the six months ended September 30, 2002 increased 22% to
$170,000 from $139,000 for the six months ended September 30, 2001. The increase
in interest expense was attributable to an increase in the average principal
loan balances during the six months ended September 30, 2002, as compared to the
six months ended September 30, 2001. The increase in principal loan balances
outstanding was primarily attributable to the MD Industries acquisition on June
21, 2002.
Net income for the six months ended September 30, 2002 increased to $3,612,000
from $2,932,000 for the six months ended September 30, 2001. The increase in net
income is attributable to the aforementioned increase in net sales and gross
profit, which were partially offset by an increase in selling, general and
administrative expenses and interest expense.
14
ITEM 2.
- -------
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
- --------------------------------------------------------------------
Net sales for the three months ended September 30, 2002 increased 13% to
$23,576,000 from $20,855,000 for the three months ended September 30, 2001. The
increase in net sales was primarily attributed to a $2,735,000 or 126% increase
in net sales of small kits and trays, a $2,286,000 or 210% increase in net sales
of the collection systems/biohazardous bags product line, a $232,000 increase in
net sales of non-woven products and a $701,000 increase in net sales of patient
aids. These increases were partially offset by a $1,279,000 or 24% decrease in
net sales of laparotomy sponges and a $1,903,000 or 29% 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 $2,480,000
of small kits and tray products acquired from Medi-Flex on November 30, 2001.
Net sales of collection systems/biohazardous bags increased primarily due to
$2,224,000 of sales of products acquired from MD Industries on June 21, 2002.
Net sales of non-woven products and patient aids was primarily due to greater
domestic market penetration.
Unit sales of laparotomy sponges decreased by 20% and average selling prices
decreased by 5%. Unit sales of operating room towels decreased by 15% and
average selling prices decreased by 16%. Management believes that the decrease
in unit sales and average selling prices of laparotomy sponges and operating
room towels was primarily due to increased competition in the domestic market.
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 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 will be able to maintain its gross margin dollars as a
percentage of net sales for these products.
Gross profit for the three months ended September 30, 2002 increased 9% to
$7,108,000 from $6,550,000 for the three months ended September 30, 2002. Gross
profit as a percentage of net sales for the three months ended September 30,
2002 decreased to 30% of net sales from 31% of net sales for the three months
ended September 30, 2001. The increase in gross profit dollars was primarily
attributable to the increase in net sales. The decrease in gross margin as a
percentage of sales was primarily attributed to a change in the sales mix from
fiscal 2001. The change in sales mix more than offset lower raw material costs
and increased manufacturing efficiencies.
Selling, general and administrative expenses for the three months ended
September 30, 2002 increased 5% to $4,126,000 from $3,924,000 for the three
months ended September 30, 2001. As a percentage of net sales, selling, general
and administrative expenses decreased to 18% for the three months ended
September 30, 2002 from 19% for the three months ended September 30, 2001. The
increase in selling, general and administrative expense dollars was primarily
attributable to increased shipping expenses associated with achieving higher
sales and increased administrative expenses to support the MD Industries
acquisition which was completed on June 21, 2002.
Interest expense for the three months ended September 30, 2002 increased 118% to
$120,000 from $55,000 for the three months ended September 30, 2001. The
increase in interest expense was
15
ITEM 2.
- -------
attributable to an increase in the average principal loan balances and interest
rates during the quarter ended September 30, 2002, as compared to the quarter
ended September 30, 2001. The increase in the average principal loan balances
outstanding was primarily attributable to the MD Industries acquisition on June
21, 2002.
Net income for the three months ended September 30, 2002 increased to $1,789,000
from $1,590,000 for the three months ended September 30, 2001. The increase in
net income is attributable to the aforementioned increase in net sales and gross
profit, which were partially offset by an increase in selling, general and
administrative expenses and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had working capital of $17,011,000 with a current ratio of 3.4 to 1
at September 30, 2002 as compared to working capital of $15,402,000 with a
current ratio of 3.4 to 1 at March 31, 2002. Total borrowings outstanding,
including Industrial Revenue Bonds of $4,060,000, were $16,725,000 with a debt
to equity ratio of .44 to 1 at September 30, 2002 as compared to $10,540,000
with a debt to equity ratio of .31 to 1 at March 31, 2002. The increase in total
borrowings outstanding at September 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 September 30,
2002, the Company had a cash balance of $712,000 compared to $785,000 at March
31, 2002.
The Company's operating activities provided cash of $3,667,000 for the six (6)
months ended September 30, 2002 as compared to $3,804,000 provided for the six
(6) months ended September 30, 2001. Net cash provided for the six (6) months
ended September 30, 2002 consisted primarily of net income from operations,
depreciation, amortization, increases in income taxes payable and increases in
accrued expenses, payroll and payroll taxes. 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.
Investing activities used net cash of $10,078,000 and $301,000 for the six (6)
months ended September 30, 2002 and September 30, 2001, respectively. The
principal uses for the six (6) months ended September 30, 2002 was for the
purchase of certain assets relating to the collecting 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 $9,527,000.
Financing activities provided cash of $6,338,000 for the six (6) months ended
September 30, 2002 compared to $3,921,000 used for the six (6) months ended
September 30, 2001. Financing activities consisted of borrowings under the
Company's existing credit facility of $10,865,000, principally to finance the
acquisition of certain assets of MD Industries, offset by principal payments of
$4,682,000. Other financing activities include cash proceeds from the exercise
of stock options of $487,000 and $334,000 used for the repurchase of the
Company's common stock.
16
ITEM 2.
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On October 25, 2002, the Company acquired certain assets relating to the
BioSafety Division of Maxxim Medical, Inc. of Waltham, Massachusetts. The
BioSafety Division, which maintains a manufacturing facility in Clarksburg, West
Virginia, consists of specialty packaging and collection systems for the
containment of infectious waste and a line of sharps containment systems. The
purchase price for the assets acquired was approximately $20,500,000, of which
$19,500,000 was paid at closing. An amount of up to $1,000,000 is payable on
February 15, 2003 subject to certain performance levels of the acquired
business.
The assets acquired included inventory, the land and manufacturing facility in
Clarksburg, West Virginia, certain fixed assets, a non competition agreement, a
supply agreement and intellectual property used in the operations of the
BioSafety Division.
The acquisition of the BioSafety division of Maxxim Medical, Inc. will be
accounted for as a purchase pursuant to Statement No. 141 as issued by the
Financial Accounting Standards Board.
The Company utilized funds under the credit agreement dated as of October 21,
2002 in order to satisfy the purchase price.
On October 21, 2002 the Company entered into a credit agreement with certain
lenders and a bank acting as administration agent for the lenders. The agreement
which replaces the sixth amended and restated Revolving Credit Note and
Agreement dated June 18, 2002 with its previous bank. The Credit Agreement
provides for borrowing of $40,000,000 and is divided into two types of borrowing
facilities, (i) a term loan with a principal amount of $25,000,000 which is
payable in twenty consecutive equal quarterly installments commencing on
December 31, 2002. The term note shall bear interest from inception on the
unpaid principal at the applicable interest rate. (ii) Revolving credit loans,
which amounts may be borrowed, repaid and reborrowed up to $15,000,000. The
revolving credit agreement expires on September 30, 2005. The revolving credit
loans shall bear interest from inception on the unpaid principal at the
applicable interest rate.
The applicable interest rate for both the term loan and revolving credit loans
shall equal the "alternate base rate" plus the applicable margin or at the
Company's option the "LIBOR rate" plus the "applicable margin". The applicable
base rate shall mean a rate per annum equal to the greater of (a) the Prime rate
or (b) the Federal Funds effective rate in effect on such day plus 1/2 of 1%.
"Applicable Margin" shall mean with respect to LIBOR loans a range of 225 basis
points to 325 basis points, with respect to Alternate base rate loans, the
applicable margin shall range from 0 basis points to 325 basis points. The rates
for both LIBOR and Alternate base rate loans are established quarterly based
upon agreed upon financial ratios. Borrowings on the revolving credit loans is
further limited to 80% of eligible accounts receivable, and 55% of eligible
inventory, as defined, with a sublimit of $7,500,000. Borrowings under this
agreement are collateralized by all the assets of the Company, and the agreement
contains certain restrictive covenants, which, among other matters, impose
limitations with respect to the incurrence of liens, guarantees, mergers,
acquisitions, capital expenditures, specified sales of assets and prohibits the
payment of dividends. The Company is also required to maintain various financial
ratios which will be measured quarterly.
At September 30, 2002, the Company had no material commitments for capital
expenditures.
17
ITEM 2.
- -------
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.
ITEM 3.
- -------
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 September 30, 2002, $12,665,000 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 $127,000
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 September 30, 2002, $4,060,000 was outstanding for
these Bonds. The Bonds bear interest at a variable rate determined weekly.
During the quarter ended September 30, 2002, the interest rate on the Bonds
approximated 1.5%. Each 1% fluctuation in interest rates will increase or
decrease interest expense on the Bonds by approximately $41,000 on an annualized
basis.
A significant portion of the Company's raw materials is 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.
ITEM 4.
- -------
PROCEDURES AND CONTROLS
- -----------------------
Within the 90 days prior to the date of this report, Medical Action Industries
Inc. carried out an evaluation, under the supervision and with the participation
of the Company's management, including the Company's Chief Executive Officer and
Principal 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 Chief Executive Officer and Principal
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
18
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
A. The Registrant held its Annual Meeting of Stockholders on
August 15, 2002
B. One Director was elected at the Annual Meeting to serve
until the Annual Meeting of Stockholders in 2005. The name
of the Director and votes cast in favor of his election and
share withheld are as follows:
Name Votes for Votes Withheld
---- --------- --------------
Dr. Philip F. Corso 7,245,906 1,067,380
C. The stockholders also approved a proposal to ratify the
appointment of Grant Thornton LLP as independent certified
public accountants of the Company for the fiscal year ended
March 31, 2003; 8,216,486 shares voted in favor of the
proposal, 80,129 shares voted against the 16,621 shares
abstained from voting.
ITEM 5. Other Information
None
ITEM 6. (a) Exhibits and Reports on Form 8-K
99 - Certification pursuant to 18 U.S.C.ss.1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
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: November 13, 2002 By: /s/ Richard G. Satin
----------------- --------------------
Richard G. Satin, Principal
Financial Officer, Vice President
of Operations and General Counsel
2