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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, 2003
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. 9,957,392 shares of
common stock as of August 7, 2003.
1
FORM 10-Q
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at June 30, 2003 (Unaudited) and March 31, 2003 3-4
Statements of Earnings for the Three Months ended June 30, 2003 and 2002 (Unaudited) 5
Statements of Cash Flows for the Three Months ended June 30, 2003 and 2002 (Unaudited) 6
Notes to Financial Statements (Unaudited) 7-13
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 14-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17-18
Item 4. Procedures and Controls 18
PART II - OTHER INFORMATION
2
ITEM 1.
MEDICAL ACTION INDUSTRIES INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
June 30, March 31,
2003 2003
---- ----
(Unaudited)
CURRENT ASSETS:
Cash $ 182 $ 892
Accounts receivable, less allowance for doubtful
accounts of $291 at June 30, 2003 and
$276 at March 31, 2003 11,563 10,145
Inventories, net 15,438 16,079
Prepaid expenses 759 477
Deferred income taxes 391 391
Prepaid income taxes 31 317
Other current assets 51 27
---------- ----------
TOTAL CURRENT ASSETS: 28,415 28,328
Property, plant and equipment, net 14,841 15,093
Due from officers 382 382
Goodwill 37,085 37,085
Trademarks 666 666
Other intangible assets 2,426 2,497
Other assets 637 693
---------- ----------
TOTAL ASSETS: $84,452 $84,744
========== ==========
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
June 30, March 31,
2003 2003
---- ----
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 3,408 $ 4,451
Accrued expenses, payroll and payroll taxes 1,777 2,107
Current portion of long-term debt 5,360 5,360
-------- --------
TOTAL CURRENT LIABILITIES: 10,545 11,918
Deferred income taxes 2,436 2,436
Long-term debt, less current portion 24,705 27,355
-------- --------
TOTAL LIABILITIES: 37,686 41,709
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized $.001 par value; issued and
outstanding 9,957,292 shares at June 30, 2003 and
9,704,892 shares at March 31, 2003 10 10
Additional paid-in capital, net 13,624 12,077
Retained earnings 33,132 30,948
-------- --------
TOTAL SHAREHOLDERS' EQUITY: 46,766 43,035
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY: $ 84,452 $ 84,744
======== ========
The accompanying notes are an integral part of these financial statements.
4
ITEM 1.
MEDICAL ACTION INDUSTRIES INC.
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended
June 30,
2003 2002
---- ----
(Unaudited) (Unaudited)
Net Sales $ 30,621 $ 22,554
Cost of Sales 22,476 15,409
-------- --------
Gross Profit 8,145 7,145
Selling, general and administrative expenses 4,369 4,167
Interest expense 322 50
Interest income (18) (18)
-------- --------
Income before income taxes 3,472 2,946
Income tax expense 1,288 1,123
-------- --------
Net income $ 2,184 $ 1,823
======== ========
Net income per share basic $ .22 $ .19
======== ========
Net income per share diluted $ .22 $ .18
======== ========
The accompanying notes are an integral part of these financial statements.
5
ITEM 1.
MEDICAL ACTION INDUSTRIES INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Ended June 30,
2003 2002
---- ----
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net Income $ 2,184 $ 1,823
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 564 295
Provision for doubtful accounts 15 10
Tax benefit from exercise of options 881 --
Changes in operating assets and liabilities net of acquisition:
Accounts receivable (1,433) (1,457)
Inventories 641 1,045
Prepaid expenses, and other current assets (306) (195)
Other assets -- 1
Accounts payable (1,043) 341
Income taxes 286 1,108
Accrued expenses, payroll and payroll taxes (330) (72)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,459 2,899
------- -------
INVESTING ACTIVITIES
Purchase price and related acquisition costs -- (9,520)
Purchase of property, plant and equipment (185) (137)
------- -------
NET CASH (USED IN) INVESTING ACTIVITIES (185) (9,657)
------- -------
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long term borrowings 4,830 8,955
Principal payments on revolving line of credit and long-term debt (7,480) (2,390)
Repurchases of company common stock -- (334)
Proceeds from exercise of employee stock options 666 96
------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,984) 6,327
------- -------
Decrease in cash (710) (431)
Cash at beginning of year 892 785
------- -------
Cash at end of period $ 182 $ 354
======= =======
The accompanying notes are an integral part of these financial statements.
6
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 three (3) month period ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended March 31,
2004. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report for the year ended March 31,
2003.
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,
2003 2003
-------- --------
(Unaudited)
(in thousands of dollars)
Finished Goods $ 7,944 $ 8,642
Work in Process 122 -
Raw Materials 7,372 7,437
-------- --------
Total $ 15,438 $ 16,079
======== ========
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 20,000 and 304,000 shares for the
three months ended June 30, 2003 and June 30, 2002, 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, 2003 and for the three months ended June 30, 2002.
7
ITEM 1.
MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. (continued)
Three Months Ended
June 30,
----------
2003 2002
---- ----
(Dollars in thousands except
per share data)
NUMERATOR:
Net income for basic and dilutive earnings
per share $ 2,184 $ 1,823
=========== ===========
DENOMINATOR:
Denominator for basic earnings per share -
weighted average shares 9,873,662 9,493,882
----------- -----------
Effect of dilutive securities:
Employee and director stock options 262,826 682,060
Warrants 6,743 10,681
----------- -----------
Dilutive potential common shares 269,569 692,741
----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares 10,143,231 10,186,623
=========== ===========
Basic earnings per share $ .22 $ .19
=========== ===========
Diluted earnings per share $ .22 $ .18
=========== ===========
8
ITEM 1.
NOTE 4. STOCK COMPENSATION
In accordance with the provisions of SFAS No. 123, the Company has elected to
apply APB 25 and related interpretations in accounting for its employee and
director stock-based awards because, as discussed below, the alternative fair
value accounting provided for under SFAS No. 123 requires use of option
valuation models that were not developed for use in valuing such employee and
director stock-based awards. All employee and director stock-based awards were
granted with an exercise price equal to the fair market value of he Company's
common stock on their date of grant. Therefore, under the provisions of APB 25,
no compensation expense has been recognized with respect to such awards. If the
Company had elected to recognize compensation expensed based on the fair value
of the employee and director stock-based awards granted at grant date as
prescribed by SFAS No. 123, net income and earnings per share would have been
reduced to the pro forma amounts indicated in the table below:
THREE MONTHS ENDED
JUNE 30,
(dollars in thousands except
per share data)
2003 2002
---- ----
Net income - as reported $2,184 $1,823
Deduct: Total stock-based employee compensation
expense determined under fair value based method
from all awards, net of related tax effects 216 146
Net income - pro forma 1,968 1,677
Earnings per share - as reported:
Basic $.22 $.19
Diluted .22 .18
Earnings per share - pro forma
Basic $.20 $.18
Diluted .20 .16
NOTE 5. STOCKHOLDERS' EQUITY
For the three (3) months ended June 30, 2003, 274,500 stock options were
exercised by employees of the Company in accordance with the Company's 1989
Non-Qualified Stock Option Plan and the 1994 Stock Incentive Plan, respectively.
The exercise price of the options exercised ranged from $2.88 per share to
$12.75 per share, the net cash proceeds from these exercises were $666,000 for
the three months ended June 30, 2003.
9
ITEM 1.
NOTE 5. (continued)
For the three 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 and the 1994 Stock Incentive 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 $96,000.
NOTE 6. ACQUISITIONS
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 including related closing costs was
approximately $20,694,000.
The assets acquired included inventory, the land and manufacturing facility in
Clarksburg, West Virginia, certain fixed assets, a non competition agreement,
customer relationships, and intellectual property used in the operations of the
Biosafety Division.
The acquisition of the Biosafety Division of Maxxim Medical, Inc. has been
accounted for as a purchase pursuant to Statement No. 141 as issued by the
Financial Accounting Standards Board. The operations of the BioSafety Division
of Maxxim Medical, Inc. have been included in the Company's statement of
earnings since the acquisition date. The following table summarizes the assets
acquired from the BioSafety Division of Maxxim Medical, Inc. and the allocation
of the purchase price:
Inventory $ 914,000
Land and building 1,380,000
Factory and office equipment 4,280,000
Goodwill 11,750,000
Trademarks 70,000
Non-competition agreement 700,000
Customer relationships 1,600,000
-----------
$20,694,000
===========
10
ITEM 1.
NOTE 6. (continued)
The BioSafety Division of Maxxim Medical, Inc. manufactures biosafety
containment products that are used to dispose of sharp medical instruments and
biological waste. Essentially, the acquisition increased the Company's market
share in these products, while gaining manufacturing efficiencies and the
benefit of increased purchasing power and lower material costs. As a result of
the acquisition, the company has projected approximately $19 million of
incremental sales to existing customers of biosafety containment products with
limited 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 trademarks will be tested for impairment periodically, in
accordance with Statement No. 142 as issued by the Financial Accounting
Standards Board. The non-competition agreement will be amortized over a period
of five years and the customer relationships will be amortized over a period of
twenty years.
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 are
anticipated to be material, because the valuation of the assets and acquisition
costs have not been finalized.
Summarized below are the unaudited pro forma results of operations of the
Company as if the BioSafety Division of Maxxim Medical, Inc. had been acquired
at the beginning of the fiscal period presented:
Three Months ended June 30,
2002
----
Net Sales $28,824,000
Net Income 2,002,000
Net income per common share
Basic $0.21
Diluted $0.20
Reclassifications and adjustments were made to the pro forma results to properly
reflect depreciation of property, plant and equipment, interest expense,
financing fees and tax rates.
The pro forma financial information presented above for the three months ended
June 30, 2002 is not necessarily indicative of either the results of operations
that would have occurred had the acquisition taken place at the beginning of the
period presented or of future operating results of the combined companies.
11
ITEM 1.
NOTE 6. (continued)
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
$9,535,000 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 allocation of the purchase price:
Inventory $ 700,000
Factory and office equipment 26,000
Goodwill 8,782,000
Trademarks 27,000
----------
$9,535,000
==========
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.
12
ITEM 1.
NOTE 7. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. We do not expect the provisions of SFAS 149 to have a material impact on
our financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 improves the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The new
Statement requires that those instruments be classified as liabilities in
statements of financial position. We do not expect the provisions of SFAS 150 to
have a material impact on our financial position or results of operations.
NOTE 8. OTHER MATTERS
The Company is a party to lawsuits arising out of the conduct of its ordinary
course of business, including those related to product liability and the sale
and distribution of its products, which management believes are covered by
insurance. 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.
13
ITEM 2.
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, 2003.
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.
14
ITEM 2.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net sales for the three months ended June 30, 2003 increased $8,067,000 or 36%
to $30,621,000 from $22,554,000 for the three months ended June 30, 2002. The
increase in net sales was primarily attributed to a $7,491,000, or 620% increase
in net sales of collection systems for the containment of medical waste, a
$1,054,000, or 17% increase in net sales of minor procedure kits and trays, and
a 131% increase in net sales of patient aids. These increases were partially
offset by a $868,000, or 19% decrease in net sales of laparotomy sponges. The
increase in net sales was primarily attributed to approximately $7,324,000 due
to net sales of products from the Company's acquisitions, $870,000 due to net
sales of new products, an increase of $1,227,000 due to increased sales volume
of existing products and a decrease of $1,537,000 due to lower average selling
prices and change in sales mix on existing products.
Management believes that the increase in net sales of collection systems for the
containment of medical waste product line was primarily due to increased net
sales of approximately $1,755,000 of those products acquired from MD Industries
on June 21, 2002, net sales of $5,569,000 of those products acquired from the
BioSafety Division of Maxxim Medical, Inc. on October 25, 2002 and greater
domestic market penetration. Net sales of minor procedure kits and trays and
patient aids increased primarily due to greater domestic market penetration.
Unit sales of laparotomy sponges decreased by 15% and average selling prices
decreased 5%. Unit sales of operating room towels increased 19% and average
selling prices decreased 15%. Management believes that the decrease in unit
sales of laparotomy sponges was primarily due to increased competition in the
domestic market. Management believes that the decrease in average selling prices
of laparotomy sponges and operating room towels was primarily due to increased
competition in the domestic market and to a change in sales mix, which it
believes will continue throughout fiscal 2004.
The Company has entered into agreements with nearly every major group purchasing
organization. These agreements, which expire at various times over the next
several years, can be terminated typically on ninety (90) day advance notice and
do not contain minimum purchase requirements. The Company, to date, has been
able to achieve significant compliance to their respective member hospitals. The
termination or non-renewal of any of these agreements may result in the
significant loss of business or lower average selling prices. In some cases, as
these agreements are renewed, the average selling prices could be materially
lower.
As a result of its recent acquisitions, collection systems for the containment
of medical waste is the Company's largest product line. The primary raw material
utilized in the manufacture of this product line is plastic resin. During fiscal
2003, world events caused the cost of plastic resin to be extremely volatile.
The Company has instituted a price increase which it believes will be accepted
by its customers.
15
ITEM 2.
Gross profit for the three months ended June 30, 2003 increased 14% to
$8,145,000 from $7,145,000 for the three months ended June 30, 2002. Gross
profit as a percentage of net sales for the three months ended June 30, 2003
decreased to 27% from 32% for the three months ended June 30, 2002. The increase
in gross profit dollars was primarily attributable to the increase in net sales.
The decrease in gross margin percentage was due primarily to lower average
selling prices and a change in sales mix.
Selling, general and administrative expenses for the three months ended June 30,
2003 increased 5% to $4,369,000 from $4,167,000 for the three months ended June
30, 2002. As a percentage of net sales, selling, general and administrative
expenses decreased to 14% for the three months ended June 30, 2003 from 18% for
the three months ended June 30, 2002. Selling, general and administrative
expenses increased primarily due to increased distribution expenses due to
higher sales volume, amortization of intangibles and increased salaries due to
the additional staff required as a result of the Company's significant growth.
The decrease in selling, general and administrative expenses as a percentage of
sales was primarily attributable to increased administration efficiencies.
Interest expense for the three months ended June 30, 2003 increased 544% to
$322,000 from $50,000 for the three months ended June 30, 2002. The increase in
interest expense was attributable to an increase in the average principal loan
balances during the three months ended June 30, 2003, as compared to the three
months ended June 30, 2002. The increase in principal loan balances outstanding
was primarily attributable to the MD Industries acquisition on June 21, 2002 and
the BioSafety Division of Maxxim Medical, Inc. acquisition on October 25, 2002.
Net income for the three months ended June 30, 2003 increased to $2,184,000 from
$1,823,000 for the three months ended June 30, 2002. 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 $17,870,000 with a current ratio of 2.7 to 1
at June 30, 2003 as compared to working capital of $16,410,000 with a current
ratio of 2.4 to 1 at March 31, 2003. Total borrowings outstanding, including
Industrial Revenue Bonds of $3,790,000, were $30,065,000 with a debt to equity
ratio of .64 to 1 at June 30, 2003 as compared to $32,715,000 with a debt to
equity ratio of .76 to 1 at March 31, 2003. The decrease in total borrowings
outstanding at June 30, 2003 was primarily attributable to net cash provided by
operating activities of $1,459,000, proceeds from exercise of employee stock
options of $666,000 and a $710,000 decrease in net cash.
The Company has financed its operations primarily through cash flow from
operations and borrowings from its existing credit facilities. At June 30, 2003
the Company had a cash balance of $182,000 compared to $892,000 at March 31,
2003.
16
ITEM 2.
The Company's operating activities provided cash of $1,459,000 for the three
months ended June 30, 2003 as compared to $2,899,000 provided for the three
months ended June 30, 2002. Net cash provided for the three months ended June
30, 2003 consisted primarily of net income from operations, decreases in
inventory, depreciation, amortization and increases in income taxes payable.
These sources of cash more than offset the increase in accounts receivable
associated with increased sales, increases in prepaid expenses associated with
annual insurance premiums paid in the first quarter and decreases in accounts
payable and accrued expenses, payroll and payroll taxes. The decreases in
inventory and accounts payable was due to purchasing strategies during the
quarter ended March 31, 2003 so as to procure lower costs on certain inventory
items. The decreases in accrued expenses, payroll and payroll taxes was
primarily due to payment of fiscal 2003 commissions and bonuses.
Investing activities used net cash of $185,000 and $9,657,000 for the three
months ended June 30, 2003 and June 30, 2002, respectively. The principal uses
for the three months ended June 30, 2003 was for the purchase of certain
equipment to be used in the Company's manufacturing facilities.
Financing activities used cash of $1,984,000 for the three months ended June 30,
2003 compared to $6,327,000 provided for the three months ended June 30, 2002.
Financing activities consisted of net principal payments under the Company's
existing credit facility of $2,650,000. Other financing activities include cash
proceeds from the exercise of stock options of $666,000.
At June 30, 2003, 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.
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
"alternate base rate" plus the applicable margin or at the Company's option the
"LIBOR rate" plus the "applicable margin". The alternate 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 75 basis points. The rates for both LIBOR and
Alternate base are loans are established quarterly based upon agreed upon
financial ratios. At June 30, 2003, $26,275,000 was outstanding under the credit
facility. Changes in the prime rate, LIBOR rates or bankers' acceptance rates
during fiscal 2004 will have a positive or negative effect on the Company's
interest expense. Each 1% fluctuation in the interest rate will
17
ITEM 3.
increase or decrease interest expense for the Company by approximately $263,000
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, 2003, $3,790,000 was outstanding for
these Bonds. The Bonds bear interest at a variable rate determined weekly.
During the quarter ended June 30, 2003, the interest rate on the Bonds
approximated 1.2%. Each 1% fluctuation in interest rates will increase or
decrease interest expense on the Bonds by approximately $38,000 on an annualized
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.
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 the 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
None
Item 5. Other Information
None
Item 6. (a) Exhibits
99.1 - Certification pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
99.2 - Certification pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated June 3,
2003 regarding Item 5 - Other Events and
Required FD Disclosure, Item 7 - Financial
Statements, Pro Forma Financial Information
and Exhibits and Item 12 - Results of
Operations and Financial Condition
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.