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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ________TO________
COMMISSION FILE NO. 0-13251
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2421849
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
800 Prime Place, Hauppauge, New York 11788
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (631) 231-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act). Yes X No
---- ----
The aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant as of June 8, 2004 was approximately
$160,000,000. As of June 8, 2004, registrant had outstanding approximately
10,245,036 shares of Common Stock.
Parts of the following documents are incorporated by reference to Parts I, II,
III and IV of this Form 10-K Report: (1) Proxy Statement for registrant's 2004
Annual Meeting of Stockholders and (2) registrant's Annual Report to
Stockholders for the fiscal year ended March 31, 2004.
================================================================================
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes "Forward-Looking Statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact are "Forward-Looking Statements" for purposes of
these provisions, including any projections of earnings, revenues or other
financial items, any statements of the plans and objectives of management for
future operations, any statements concerning proposed new products or services,
any statements regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing. All Forward-Looking
Statements included in this document are made as of the date hereof and are
based on information available to the Company as of such date. The Company
assumes no obligation to update any Forward-Looking Statement for any reason,
except as required by law. In some cases, Forward Looking Statements can be
identified by the use of terminology such as "may," "will," "expects," "plans,"
"anticipates," "intends" or "believes," "estimates," "potential," or "continue,"
or the negative thereof or other comparable terminology. Although the Company
believes that the expectations reflected in the Forward-Looking Statements
contained herein are reasonable, there can be no assurance that such
expectations or any of the Forward-Looking Statements will prove to be correct,
and actual results could differ materially from those projected to assumed in
the Forward-Looking Statements. Factors that might cause such differences
include, but are not limited to, those discussed in the subsection entitled
"Factors That May Affect Future Results and Financial Condition" under Part One
of this Report. All subsequent Forward-Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements.
ITEM ONE - BUSINESS
COMPANY BACKGROUND
Medical Action Industries Inc. ("Medical Action" or the "Company") was
incorporated under the laws of the State of New York on April 1, 1977, and
re-incorporated under the laws of the State of Delaware on November 5, 1987.
Headquartered in Hauppauge, New York, Medical Action develops, manufactures,
markets and supplies a variety of disposable medical products. The Company's
products are marketed primarily to acute care facilities in domestic and certain
international markets, and in recent years has expanded its end-user markets to
include physician, dental and veterinary offices, out-patient surgery centers
and long-term care facilities. Medical Action is a leading manufacturer and
supplier of collection systems for the containment of medical waste, minor
procedure kits and
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trays, sterile operating room towels and sterile laparotomy sponges. The
Company's products are marketed by its direct sales personnel, extensive network
of distributors and manufacturers' representatives. Medical Action has entered
into preferred vendor agreements with national distributors, as well as sole
source and/or committed contracts with group purchasing alliances. The Company
also manufactures its products under private label programs to other
distributors and medical suppliers. Medical Action's manufacturing, packaging
and warehousing activities are conducted in its Arden, North Carolina and
Clarksburg, West Virginia facilities.
BUSINESS STRATEGY
The Company's strategy is to focus its resources on entering new markets
for its existing product lines, including alternate care, physician, veterinary
and dental markets; accelerate the internal development of new products for its
existing markets and pursuit of acquisitions which include products that
complement existing product lines for utilization of the Company's extensive
sales and distribution channels; the introduction of its products into the
international marketplace; and to increase productivity by maximizing the
utilization of its existing facilities.
During the past several years, the Company has engaged in an active
acquisition program completing nine transactions since 1994. These transactions
include:
O In August 1994, the Company acquired the disposable surgical products
business of QuanTech, Inc. The acquired products include a proprietary
surgical light handle cover, uniquely designed and patented, which is used
as a sterile barrier on surgical light handles in the operating room. The
acquired line also produces and markets needle counters, instrument
pouches, magnetic instrument drapes, and related products used primarily in
the operating room environment.
o In January 1996, the Company acquired certain assets relating to the
sterilization packaging, monitoring and contamination control products
business of Lawson Mardon Medical Products, Inc. ("Lawson Mardon"). The
primary products acquired from Lawson Mardon include sterility packaging, a
line of sterilization indicators and integrators and such ancillary
products as infectious waste bags, laboratory specimen bags and sterility
maintenance covers. These products are used in hospital central supply,
operating rooms and in physicians' offices.
o In October 1997, the Company acquired substantially all of the assets
relating to the specialty packaging business of Dayhill Corporation
("Dayhill"). The acquired products principally consisted of collection
systems for the containment and transport of biohazardous waste, including
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biohazard bags, autoclave bags, laboratory transport bags, zip lock bags
and sponge counting bags.
o In January 1998, the Company acquired the sponge counter product lines of
Sage Products, Inc., which included a uniquely designed and patented
surgical sponge counting system, SAFE-T-Count(TM), as well as a counting
system known as Pocket Count(TM).
O In March 1999, the Company acquired the medical products division of Acme
United Corporation ("Acme Healthcare"). Acme Healthcare, one of the first
companies to design and sell disposable instrument kits and trays, is
principally comprised of three product categories - (i) kit and tray
products, including suture removal trays, I.V. start kits, and central line
trays; (ii) net, padding, wound care and antiseptic products, including
Acu-Dyne(R), an anti-microbial solution of povidone iodine which comes in
various packages and applicators, and a line of proprietary Tubegauze(R)
elastic netting used in dressing retention; and (iii) instrument packs,
which include a broad line of sterile instruments, such as hemostats,
scalpels, forceps and needle holders.
o In November 2001, the Company acquired the business related to sterile kits
for the insertion of intravenous catheters ("I.V. Start Kits") and sterile
procedure trays containing components necessary for the maintenance of
large catheters inserted into the chest cavity ("Central Line Dressing
Trays") from Medi-Flex Hospital Products, Inc.
o In June 2002, the Company acquired the specialty packaging and collection
systems for the containment of infectious waste and sterilization products
business of MD Industries. The acquired products principally consisted of
sterilization packaging, and collection systems including laundry and linen
collection bags, zip lock closure bags, patient belonging bags, equipment
dust covers, water soluble laundry bags, chemotherapy waste collection bags
and biohazard safety and collection bags.
o In October 2002, the Company acquired the BioSafety Division of Maxxim
Medical, Inc., which consisted of a line of sharps containment systems
primarily for the alternate care market and a line of collection systems
for the containment of infectious waste including laundry and linen
collection bags, zip lock closure bags, patient belonging bags, equipment
dust covers, water soluble laundry bags, chemotherapy waste collection bags
and biohazard safety and collection bags.
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The Company's products are divided into four (4) categories:
o Collection Systems for the Containment of Medical Waste
o Minor Procedure Kits and Trays
o Operating Room Disposables and Sterilization Products
o Dressings and Surgical Sponges
Within each of these categories are multiple product lines that have either
been internally developed or acquired by acquisition, as set forth below:
COLLECTION SYSTEMS FOR THE CONTAINMENT OF MEDICAL WASTE
o Biohazardous Waste Collection Bags o Laboratory Specimen Transport Bags
o Autoclavable Bags o Patient Belongings Bags
o Non-infectious Medical Waste Bags o Sharps Containment Systems
o Chemotherapy Waste Collection Bags o Equipment Dust Covers
o Laundry and Linen Collection Bags o Zip Closure Bags
MINOR PROCEDURE KITS AND TRAYS
o I.V. Start Kits o Laceration Trays
o Central Line Dressing Trays o Instruments and Instrument Trays
o Suture Removal Trays o Incision & Drainage Trays
o General Purpose Instrument Trays o Wound Dressing Change Trays
o Venipuncture Trays o Sharp Debridement Trays
OPERATING ROOM DISPOSABLES AND STERILIZATION PRODUCTS
o Absorbent Operating Room Towels o Sterilization Pouches
o Surgical Marking Pens o Sterilization Indicators
o Magnetic Drapes o Sterilization Integrators
o Needle Counters o Bowie Dick Test Packs
o Light Shields o Sterility Maintenance Covers
o Convenience Kits o Sealers and Cutters
o Surgical Headwear and Shoe Covers o Instrument Protection
o Isolation Gowns o Patient Aids
DRESSINGS AND SURGICAL SPONGES
o Burn Dressings o Gauze Sponges
o Disposable Laparotomy Sponges o Sponge Counting System
o Specialty Sponges o Conforming Bandage Rolls
o SOF KRIMP(R)Bandage Rolls o SeproNet(R)
O TUBEGAUZ(R) ELASTIC NET
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The following paragraphs contain a brief description of, and provide other
information regarding, Medical Action's key products:
Collection Systems for the Containment of Medical Waste
BIOHAZARDOUS WASTE COLLECTION AND AUTOCLAVE BAGS - Various state and
federal regulations require that infectious medical waste be collected, stored,
transported and disposed of in specially designed and specifically labeled
containers. The Company's infectious waste collection bags, known as biohazard
bags or "red bags", are constructed from high quality resins with reinforced
seals for puncture resistance to reduce the risk of leakage. The bags come in a
variety of sizes, and are red, and are clearly labeled with the international
biohazard symbol. Autoclave bags are designed to survive the heat generated in a
steam autoclave and are used to contain infectious waste through steam
sterilization and disposal.
NON-INFECTIOUS MEDICAL WASTE COLLECTION BAGS - Non-infectious medical waste
and trash must be collected, stored, transported and disposed of in a separate
waste stream from potentially infectious or biohazardous waste. The Company's
non-infectious medical waste bags come in a variety of sizes, materials, mil
thicknesses and seal configurations to isolate the range of non-infectious
medical waste generated at healthcare provider sites from collection to
disposal.
CHEMOTHERAPY WASTE COLLECTION BAGS AND SHARPS CONTAINERS - Waste
contaminated with chemotherapeutic agents must be disposed of in a separate
waste stream from normal infectious and non-infectious medical waste due to the
toxic nature of many of these agents. The Company's chemotherapy waste
collection bags and sharps containers are made of special resins for the
collection and containment of chemo waste through disposal.
LAUNDRY AND LINEN COLLECTION SYSTEMS AND DISPOSABLE BAGS - Infectious and
non-infectious reusable laundry and linen must be collected in specifically
designed and clearly labeled receptacles and be segregated from the infectious
and non-infectious medical waste streams. The Company offers laundry and linen
collection systems consisting of hamper style receptacles and disposable laundry
and linen receptacle bags for the collection, storage and transportation of
infectious and non-infectious laundry and linen.
LABORATORY SPECIMEN TRANSPORT BAGS - Used to collect, transport and contain
tissue samples and other patient specimens obtained from examinations,
diagnostic, or surgical procedures. The bags feature a specimen compartment and
documentation pouch to insure that specimens and paperwork do not become
separated during transport.
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PATIENT BELONGING BAGS - Used to collect, contain and transport patient
belongings from admission to discharge. The bags come in a variety of sizes, and
thicknesses, and utilize a combination of handle, drawstring closure, and zip
closure designs. these bags are often customized with hospital or healthcare
facility logos and designs.
SHARPS CONTAINMENT SYSTEMS - Various state and federal regulations require
that certain infectious medical waste, such as needles and blades, be collected,
contained, transported and disposed of in rigid containers. The Company's sharps
containers come in variety of sizes and configurations and are constructed from
high quality resins protecting the public and healthcare workers from accidental
stick injuries and potential transmission of pathogens in blood and body fluids.
These containers are designed to be puncture resistant and to have torturous
path means of egress once a contaminated device is placed inside.
EQUIPMENT DUST COVERS - are used for the protection of hospital
equipment which is non-sterile. They provide a dust and dirt barrier for
equipment that is stored between procedures.
MINOR PROCEDURE KITS AND TRAYS
The Company offers kits and trays which are used for a wide variety of
minor surgical and medical procedures. Kit components are determined by the
procedural requirements and may be customized to accommodate individual hospital
protocols and preferences. Procedural applications and typical components for
the Company's larger kits segments are as follows:
I.V. START KITS - One of the most common medical procedures is intravenous
administration of fluids and medications usually done through an I.V. catheter
or needle which is inserted into a peripheral vein. Since infection at the site
of the catheter insertion can become systemic and potentially serious. I.V.
start kits are used to insure speed and efficiency of catheter insertion while
promoting sound clinical protocol. Typical components include a tourniquet,
antiseptic ampule or swab, gauze, alcohol prep pads and a dressing. The
Company's I.V. start kits are marketed under the ActaSept(TM) and Cepti-Seal(R)
brands. For the fiscal year ended March 31, 2004, 2003 and 2002, I.V. Start Kits
accounted for 11%, 9% and 4%, respectively, of the Company's total sales.
CENTRAL LINE DRESSING TRAYS - Central line dressing trays are used to
provide for cleansing and dressing placement at the site of a central venous
catheter (CVC) which is typically placed in a vein in the patient's chest area
and is used for the rapid infusion of fluids and medications. Since infection at
the site of catheter insertion can become systemic and represents a potentially
serious medical complication, central line dressing kits facilitate fast and
efficient dressing changes while allowing the clinician to maintain sterile
technique.
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Typical components include an antiseptic ampule or swabs, gloves, gauze tape and
a transparent dressing. The Company's Central Line Dressing Trays are marketed
under the ActaSept(TM) and Cepti-Seal(R) brands.
SUTURE REMOVAL TRAYS - Post procedural suture removal is a medical
procedure commonly performed in physicians' offices, outpatient settings, and
hospital emergency rooms among other acute and alternate care settings. The
procedure requires precise instruments for grasping and cutting fine sutures.
Typical suture removal tray components include Littauer scissors, alcohol prep
pads, metal or plastic forceps and the Company's proprietary ACU-dyne(TM)
povidone iodine anti-microbial solution.
LACERATION TRAYS - Laceration trays are used to facilitate closure of
lacerations and other deep wounds. Use is primarily concentrated in hospital
emergency rooms although they are sold in both acute and alternate care settings
wherever emergent care is provided. Typical components are high quality
disposable instruments including needle drivers, forceps, scissors and
hemostats, as well as drapes for creation of a sterile field, gauze and syringes
and needles for administration of a local anesthetic.
INSTRUMENTS AND INSTRUMENT TRAYS - The Company offers a broad array of high
quality disposable needle holders, hemostats, various procedural scissors,
scalpels and forceps. These instruments are available in stainless steel, bent
wire, and plastic versions. They can be purchased in bulk, packaged sterile as
individual instruments, or combined in custom sterile instrument trays.
OPERATING ROOM DISPOSABLES AND STERILIZATION PRODUCTS
ABSORBENT OPERATING ROOM TOWELS - The Company's line of cotton absorbent
operating room towels are used during surgery for drying hands, rolled up for
propping instruments, on back tables and mayo stands for absorbing fluids,
around the incision site for absorbing blood and to allow the surgeon to clip
tubing and instruments close to the surgical site during the surgical procedure.
Operating room towels are sold in sterile packaging for single (disposable) use
and as a non-sterile component to be used with other health care companies'
products, primarily surgical pre-packaged procedure trays. For the fiscal years
ended March 31, 2004, 2003, and 2002, operating room towels accounted for 17%,
20%, and 29%, respectively, of the Company's net sales.
SURGICAL MARKING PENS - Used for marking the patient skin prior to making a
surgical incision. Specifically designed so that the pen barrel fits comfortably
in the surgeon's hand and is made with gentian violet color ink. All pen barrels
are embossed with a 5 cm. ruler and may also include a 15 cm. coated ruler and
blank labels.
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NEEDLE COUNTERS - Red plastic boxes manufactured from medical grade
materials designed to resist breakage and punctures. They are produced with a
variety of designs, including surgical grade magnets in order to facilitate
sharps disposal, foam blocks and foam strips with varying count capacity and
designs.
DISPOSABLE SURGICAL LIGHT HANDLE COVERS - LIGHT SHIELDS(TM) - A patented
design assures a secure fit and acts as a sterile barrier on surgical light
handles in the operating room. Light Shields(TM) are manufactured of a heavy
gauge flexible plastic for the optimum assurance of a sterile barrier.
CONVENIENCE KITS - The Company offers its customers the ability to purchase
multiple products packaged with its needle counters. The Company has the
flexibility to package many different kits to individualize a hospital's
requirements.
SURGICAL HEADWEAR AND SHOE COVERS - Worn by operating room and other
critical care personnel these items prevent contamination of sterile and clean
environments from dust and other gross contaminants as well as protection of
healthcare worker apparel. Bouffant caps made of lightweight spunbond
polypropylene and surgeon's caps made of kaycel are comfortable and absorbent.
Shoe covers are made of durable polypropylene and are available with a skid
resistant coating.
ISOLATION GOWNS - The Company's line of disposable isolation gowns are used
to prevent contamination of health care worker apparel during a variety of
medical procedures. They are available in yellow fluid resistant spunbond cloth
and impervious poly coated spunbond configurations.
STERILIZATION POUCHES - Used to house instruments during the sterilization
process and maintain sterility of the instrument until it is needed. The pouches
are primarily used in hospital central supply, operating rooms and in
physicians' and dentists' offices as well as in any environment where sterile
instruments are needed. There are three different styles of pouches available -
self seal, heat seal and rolls. The self seal is already sealed on three sides
and includes a peel back adhesive strip on the bottom of the package, which when
folded over will seal the package. The second type is heat seal, which is also
sealed on three sides but needs a heat sealer to seal the fourth side. The
Company also markets a roll product, where the user can pull as long a pouch as
needed and then seal each end of the pouch.
STERILIZATION MONITORING PRODUCTS - These are printed paper and chemical
devices used to measure certain necessary parameters within a sterilization
cycle. Predominate users include the hospital operating room which often houses
steam sterilization units for unanticipated needs while cases are in progress,
and the central sterile department which cleans, packages and sterilizes the
bulk of reusable surgical supplies.
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Indicators: measures the presence of ETO or steam and
temperature
Integrators: a new technology that gives a better assurance than
traditional indicators that the proper parameters of
sterilization were fulfilled, including time,
temperature and moisture.
Bowie Dick Test Pack: tests for residual air left in an autoclave from air
leaks, insufficient vacuum or poor steam quality.
Prior to sterilization indicators and integrators are placed inside of the
packaged products and sterilization pouches which are then distributed and used
throughout the hospital, clinic or physician office environment.
PATIENT AIDS
CRUTCHES - Lightweight aluminum adjustable patient crutches complete with
tips and pads. Push-button adjustable foot piece for fast, precise measuring and
fitting. We offer a full range of sizes - child, youth, adult, and tall adult.
Used to assist mobility in the event of a leg, foot, or ankle injury.
WALKERS - Lightweight, high strength aluminum patient walkers. Contoured
PVC handgrips for comfort and rubber tips for traction. They are available in a
1-button and 2-button version that facilitates folding of the walkers for easy
storage and transport. Used to assist patient mobility for both the short and
long term.
CANES - Lightweight, high strength aluminum patient canes that are fully
height adjustable from 30" to 39" in 1" increments. PVC handgrip for comfort and
non-slip rubber tip for stability. Used to assist patient mobility for both the
short and long term.
PATIENT SLIPPERS - Skid resistant patient slippers available in a full
range of sizes from infant, toddler, youth, to adult (from small to XXL). Color
coded by size. Used to prevent slipping and to provide warmth and comfort in
both acute care and long-term care market settings.
DRESSINGS AND SURGICAL SPONGES
BURN DRESSINGS - The Company provides dry burn dressings and non-adherent
gauze burn dressings. The dry burn dressings are composed of multiple layers of
folded gauze that are typically customized for individual hospitals as to size,
weave, folds, and stitching. The non-adherent dressings reduce sticking and skin
removal during dressing changes, thereby alleviating trauma and pain to the
wound site. The Company markets certain non-adherent burn dressings under the
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ActiGauz(TM) brand which has a patented break away feature of the non-adherent
layer which improves patient comfort and permits visualization and cleansing of
burn and graft sites while minimizing trauma from dressing removal.
DISPOSABLE LAPAROTOMY SPONGES - Laparotomy sponges are designed primarily
for use during surgical procedures in hospitals and health facilities. They are
single use (disposable) and made of gauze and sold in varying sizes and utilized
for a multitude of purposes. Laparotomy sponges cover exposed internal organs,
isolating them from the part of the body being operated upon. They also absorb
blood and act as buffer between medical instruments and the skin, thereby
reducing trauma to the skin tissue caused by the medical instrument. Laparatomy
sponges are sold in sterile packaging or as a non-sterile component to be used
with other health care companies' products, primarily surgical pre-packaged
procedure trays. The Company's laparotomy sponges contain an x-ray detectable
element and loop handle in order to facilitate easy counting and identification
in the operating room. For the fiscal years ended March 31, 2004, 2003, and
2002, laparotomy sponges accounted for 11%, 15%, and 23% respectively, of the
Company's total sales.
SPECIALTY SURGICAL SPONGES - The Company's line of specialty surgical
sponges is an extension to its laparotomy sponge product line. They are single
use (disposable) and made of gauze and sold in varying sizes and shapes. The
design of these sponges is tailored to specific surgical applications for which
a standard laparotomy sponge is sub-optimal. There are two classifications of
specialty surgical sponges:
a) Specialty Sponges for Open Surgical Procedures - including Peanut,
Kittner, and Cherry dissecting sponges, used for blunt tissue
dissection and fluid absorption, Tonsil Sponges with abdominal tape
strings for easy retrieval from narrow body cavities, Stick Sponges
used for surgical prepping and fluid absorption in deeper body
cavities, and Eye Spears for absorption during eye surgery.
(b) Endoscopic Specialty Sponges - including Kittner, Cherry, and Bullet
style dissecting sponges. Endoscopic specialty sponges are small
sponges affixed to long fiberglass rods and are designed for
performing blunt tissue dissection, fluid absorption, and anatomical
manipulation through the narrow operating cannulae used in minimally
invasive endoscopic surgery.
GAUZE SPONGES - Gauze sponges are used in the operating room as well as
throughout the hospital. They are also used extensively throughout the alternate
care market, including physicians' offices, health clinics, and dentists'
offices and in veterinary practices. The Company also introduced gauze fluffs,
which are pre-folded gauze sponges used for compression and absorption of blood
and other fluids.
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SPONGE COUNTING SYSTEM - The Company's line of sponge counter bags is
designed to facilitate and improve the post-procedural counting of surgical
sponges. Peri-operative nursing protocol calls for a systematic count of used
and unused sponges and instruments pre and post surgically to insure that
foreign bodies are not left in the body cavity. The Company's Pocket Count(TM)
and patented SAFE-T-Count(TM) are clear faced opaque backed plastic bags with up
to 10 sponge compartments. The compartments act as fluid receptacles while
providing visualization of used sponges for fast and accurate post surgical
counting.
NET, PADDING AND WOUND CARE - Includes proprietary Tubegauz(R) premium
brand and SePro(R) value brand elastic nets, which are tubular bandages used for
dressing retention. This category also includes Tubegauz(R) brand tubular gauze,
which is used to bandage fingers, toes, hands, or other areas that require
wrapping to bodily contours. Padding products are used as a protective
cushioning material for sensitive areas, and are sold in styles that offer
unique characteristics such as being mold-resistant, water-repellant or designs
for improved air circulation.
PATENTS AND TRADEMARKS
The Company actively pursues a policy of seeking patent protection, both in
the United States and abroad, for its proprietary technology. There can be no
assurance that the Company's patents will not be violated or that any issued
patents will provide protection that has commercial significance. Litigation may
be necessary to protect the Company's patent position. Such litigation may be
costly and time-consuming, and there can be no assurance that the Company will
be successful in such litigation. Since no single patent covers product lines
that constitute 5% or more of any sales of the Company for fiscal 2004, the
Company does not believe that any violation of any patents owned by the Company
would have a material adverse effect on it or its business prospects.
The Company owns several patents and trademarks. While it considers that in
the aggregate the patents and trademarks are important in the operation of its
business, it does not consider that any of them, or any group of them, are of
such importance that termination would materially affect its business.
Although there is no assurance that other companies will not be successful
in developing similar products without violating the rights of the Company,
management does not believe that the invalidation of any patents owned by the
Company would have a material adverse effect on it or its business prospects.
While the protection of patents is important to the Company's business,
management does not believe any one patent is essential to the success of the
Company.
The Company also relies on trade secrets and product advancement to
maintain its competitive position. There can be no assurance that the Company
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will prevent the unauthorized disclosure or use of its trade secrets and
know-how or that others may not independently develop similar trade secrets or
know-how or obtain access to the Company's trade secrets, know-how or
proprietary technology.
GROUP PURCHASING AGREEMENTS
Hospital chains and large buying groups have played, and are expected to
continue to play, an increasingly significant role in the purchase of medical
devices. In 2004, group purchasing organization ("GPO") purchasing accounted for
approximately $28 billion of sales in the medical products industry. In recent
years, these groups have sought to narrow their list of suppliers. By acting as
a supplier to a GPO the Company can operate its sales force much more
efficiently. As a result, the Company's sales force continues to call on
facilities associated with these buying groups in order to improve compliance
with these group purchasing agreements and improve market share. These
agreements, which typically have no minimum purchase requirements, can be
terminated on ninety (90) days advance notice. The termination or non-renewal of
any of the agreements could have a material adverse effect on the Company's
business.
COMPETITION
The markets in the Company's product lines are highly competitive. In
general, the Company's products compete with the products of numerous major
companies in the business of developing, manufacturing, distributing and
marketing medical products. Some of these competitors have greater financial or
other resources than the Company. The Company believes that the principal
competitive factors in each of its markets are (i) product design, development
and improvement, (ii) customer support; (iii) brand loyalty; and (iv) price. The
Company emphasizes overall value through a combination of competitive pricing,
product quality and customer service.
The competitors differ based upon the products being sold. In the sale of
sterile laparotomy sponges, where Allegiance Healthcare Corporation, a
subsidiary of Cardinal Health, Inc., the Kendall Company, a subsidiary of Tyco
Industries, Inc. and Medline Industries, Inc. are competitors, Medical Action's
sales represent a significant share of the domestic market. The Company's
primary competitors in the sale of sterile operating room towels, in which the
Company is also a leading supplier in the domestic market, are Allegiance
Healthcare Corporation, a Subsidiary of Cardinal Health, Inc., Medline
Industries, Inc. and DeRoyal, Inc. Management believes that the breadth of its
line of collection systems for the containment of medical waste is the most
complete in the industry, where it competes with Allegiance Healthcare
Corporation, a subsidiary of Cardinal Health, Inc., Donovan, Inc. and Heritage
Bag Company. In the sale of minor procedure kits and trays where the Company has
a significant market share, the Company's primary competitors include Allegiance
Healthcare, a subsidiary of Cardinal Health,
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Inc., Becton Dickson and the Kendall Company, a subsidiary of Tyco Industries,
Inc. In the sale of medical pouches to the hospital market, where the Company is
one of the leading suppliers, the Company's primary competitors include
Allegiance Healthcare, a subsidiary of Cardinal Health, Inc. In the sale of
operating room disposables, where the Company's portion of the market is
relatively insignificant, the Company's primary competitor is Devon Industries,
Inc., a subsidiary of Tyco Industries, Inc.
HEALTHCARE REFORM
In recent years, several comprehensive healthcare reform proposals were
introduced in the U.S. Congress. The intent of the proposals was, generally, to
expand healthcare coverage for the uninsured and reduce the growth of total
healthcare expenditures. While none of the proposals were adopted, healthcare
reform may again, be addressed by the current U.S. Congress. While the Company
cannot predict whether any healthcare reform legislation will be approved or
what effect, if any, that such healthcare reform legislation will have on the
Company or its operations, the Company believes that based on the intent of such
proposals, healthcare legislation may have some beneficial effects on its
business by increasing the availability of healthcare.
REGULATION
As a manufacturer of medical devices, the Company is subject to regulation
by, among other governmental entities, the U.S. Food and Drug Administration
("FDA") and the corresponding agencies of the states and foreign countries in
which the Company sells its products. These regulations govern the introduction
of new medical devices, the observance of certain standards with respect to the
manufacture, testing and labeling of such devices, the maintenance of certain
records, the tracking of devices and other matters. All medical devices are
required to be registered with the FDA. The Company must update its
establishment and listing information on an annual basis.
Pursuant to the Food, Drug and Cosmetic Act ("FDC Act"), medical devices
intended for human use are classified into three categories, Classes I, II and
III, on the basis of the controls deemed necessary by the FDA to reasonably
assure their safety and effectiveness. Class I devices are subject to general
controls (for example, labeling, premarket notification and adherence to good
manufacturing practice regulations) and Class II devices are subject to general
and special controls (for example, performance standards, post-market
surveillance, patient registries and FDA guidelines). Generally, Class III
devices are those which must receive premarket approval ("PMA") from the FDA to
ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices. Class I devices,
unless exempt, and Class II devices require premarket notification clearance
pursuant to Section 510(k) of the FDC Act. Class
14
III devices are required to have a PMA. A 510(k) premarket notification
clearance indicates that the FDA agrees with an applicant's determination that
the product for which clearance has been sought is substantially equivalent to
another medical device that has been previously marketed. To date, all of the
Company's products have received 510(k) clearances or are exempt from the 510(k)
clearance process.
In addition to requiring clearance or approval for new products, the FDA
may require clearance or approval prior to marketing products that are
modifications of existing products. The FDC Act provides that new 510(k)
clearances are required when, among other things, there is a major change or
modification in the intended use of the device or a change or modification to a
legally marketed device that could significantly affect its safety or
effectiveness. A manufacturer is expected to make the initial determination as
to whether a proposed change to a cleared device or to its intended use is of a
kind that would necessitate the filing of a new 510(k) notification.
The Company is also required to register with the FDA as a device
manufacturer and to comply with the FDA's Good Manufacturing Practices under the
Quality System Regulations ("GMP/QSR"). These regulations require that the
Company manufacture its products and maintain its records in a prescribed manner
with respect to manufacturing, testing and control activities. The Company's
manufacturing, quality control and quality assurance procedures and documents
are inspected and evaluated periodically by the FDA.
The European Union has promulgated rules, under the Medical Devices
Directive, or MDD, which require medical devices to bear the "CE mark". The CE
mark is an international symbol of adherence to quality assurance standards. The
Company received ISO9001/EN46001 certification for its Arden, North Carolina
manufacturing facility and has instituted all the systems necessary to meet the
Medical Device Directive, thus acquiring the ability to affix the CE mark to
certain products.
SALES, MARKETING AND CUSTOMERS
The Company's products are presently marketed and sold primarily to acute
care facilities throughout the United States through a network of direct sales
personnel and manufacturers' representatives. In addition, the Company has
expanded its target markets to include physician, dental and veterinary offices,
out-patient surgery centers and long-term care facilities.
The Company's sales representatives typically attempt to establish and
maintain direct contact with medical professionals that directly utilize the
Company's products. As medical product purchases are typically made on a
centralized basis by hospital purchasing departments, and increasingly by
healthcare networks, sales representatives must also maintain relationships with
purchasing department personnel. The Company has approximately 40 direct
15
sales personnel and 1 manufacturers' representatives throughout the United
States engaged in the sales and marketing of the Company's products.
Sales are primarily made to independent distributors, who maintain
sufficient inventory to service customer requirements. The Company's
distribution network is comprised of hospital distributors, alternate care
distributors, physician distributors, veterinary distributors, dental
distributors and industrial safety distributors covering the entire United
States and certain international marketplaces. The Company's products are
typically purchased pursuant to purchase orders or supply agreements in which
the purchaser specifies whether such products are to be supplied through a
distributor or directly by the Company.
Management believes that the continuing pressure to utilize low-cost,
disposable medical products has significantly expanded the use of custom
procedure trays, which contain the necessary items designed for use in specific
procedures by surgical teams. Many of the custom tray suppliers are vertically
integrating the packaging process by buying bulk, non-sterile operating room
towels, laparotomy sponges and other products manufactured by the Company to
place in these custom trays. The trays are then sterilized, saving valuable
nursing time and the costs associated with individual product packaging.
The Company records sales upon the shipment of inventory to the
distributor, at which time title passes to the distributor. Pricing to its
ultimate customer under these supply agreements is usually established for the
contract period, which will typically be from one to three years. The Company
views its ultimate customers as the medical professionals who use its products,
rather than the distributors.
No individual customer or affiliated group of customer accounts accounted
for more than 10% of the Company's net sales in any of the past three fiscal
years. Nevertheless, sales to Owens & Minor, Inc., Allegiance Healthcare
Corporation and McKesson General Medical, diversified distribution companies
(the "Distributors") accounted for approximately 33%, 19%, and 10%,
respectively, for the fiscal year ended March 31, 2004, 34%, 20%, and 11% of net
sales, respectively, for the fiscal year ended March 31, 2003, and 33%, 28% and
10%, of net sales, respectively, for the fiscal year ended March 31, 2002.
Although the Distributors may be deemed in a technical sense to be major
purchasers of the Company's products, the Distributors typically serve as a
distributor under a purchase order or supply agreement between the customer and
the Company and does not purchase for its own account. The Company, therefore,
does not believe it is appropriate to categorize the Distributors as actual
customers.
The Company believes it has established an efficient system for marketing
its products throughout the United States, and intends to utilize these existing
sales methods and channels to market new products as they are developed or
acquired.
16
RESEARCH AND DEVELOPMENT
The company is continually conducting research and developing new products
utilizing a team approach that involves its engineering, manufacturing and
marketing resources. Although the Company has developed a number of its own
products, most of its research and development efforts have historically been
directed towards product improvement and enhancements of previously developed or
acquired products. Product development expenses were $425,000, $529,000, and
$453,000 for the fiscal years ended March 31, 2004, 2003, and 2002,
respectively.
EMPLOYEES
As of June 1, 2004, the Company had 389 full-time employees with 313 in
manufacturing and distribution, 49 in marketing and sales, and 27 in
admini-stration. None of the Company's employees are represented by a labor
union. In connection with the Company's acquisition in October 2002 of the
BioSafety Division of Maxxim Medical, Inc., the employees in the Clarksburg,
West Virginia facility were represented by the Chauffeurs, Teamsters and Helpers
Local Union No. 175 (the "Union"). In December 2002, the employees of
Clarksburg, West Virginia voted to decertify the Union of its representation.
The Company believes that its employee relations are satisfactory.
BACKLOG
The Company does not believe that its backlog figures are necessarily
indicative of its business since most hospitals and health related facilities
order their products on a continuous basis and not pursuant to any contractual
arrangements. Since typical shipment times range from two to five days, the
Company must maintain sufficient inventories of all products at all times.
RAW MATERIALS AND MANUFACTURING
The principal raw materials used by the Company are a four-ply mesh gauze
laparotomy sponge, cotton huck towel and various types of plastic resin. Other
materials and supplies used by the Company include gauze, gauze sponges,
injection molded and thermoformed plastics, medical instruments, foam, medical
grade magnets and a variety of packaging material. Several of these raw
materials are supplied from vendors outside the United States.
Medical Action's variety of suppliers for raw materials and components
necessary for the manufacture of its products, as well as its long term
relationships with such suppliers, help to ensure the stability in its
manufacturing process. Historically, Medical Action has not been materially
affected by interruptions with such suppliers. However, if a supplier of
significant raw
17
materials, component parts, finished goods or services were to terminate its
relationship with the Company, or otherwise cease supplying raw materials,
component parts, finished goods or services consistent with past practices, the
Company's ability to meet its obligations to its customers may be disrupted. A
disruption with respect to numerous products, or with respect to a few
significant products, could have a material adverse effect on the Company's
business and financial condition.
The Company presently purchases its principal cotton raw materials
primarily from the Peoples Republic of China and to a lesser extent, India and
is currently sourcing instruments from Pakistan, a portion of its thermoform
plastics from Taiwan, packaging material from the United Kingdom and needle
counters from the People's Republic of China. From time to time, the Company has
purchased certain of its raw materials from a number of other countries
including Mexico and the Dominican Republic. Some of the Company's products are
purchased as components or in final form, which are shipped to the Company's
manufacturing facility in Arden, North Carolina, where they are packaged. The
Company's sterilization pouches and minor procedure kits and trays are
predominantly manufactured and/or assembled in the Company's Arden, North
Carolina manufacturing facility. The Company utilizes outside contract
sterilization facilities for some of its products.
In the Company's Clarksburg, West Virginia facility, where the Company
manufactures its collection systems for the containment of infectious waste and
sharps containers, four (4) types of plastic resin are utilized in the various
processes; (i) linear low density polyethylene; (ii) high density polyethylene;
(iii) blow-molding polypropylene; and (iv) film extrusion polypropylene.
In the manufacture of collection systems, resin is extruded to the die
where it emerges in a gelatinous state. The extruder and die are positioned
under a cooling tower where the emerging plastic is pressed closed and air is
blown into it creating a cylindrical column. The column is then pulled up the
tower and back down over conveying rollers, and is threaded through a printer,
bag machine, triangle folder, separator and air folder into an individually
folded bag. The sharps containers are produced by blow-molding the plastic into
an open mold, where air is then introduced into the mold which produces the same
results as in injection molding.
AVAILABLE INFORMATION
The Company files annual, quarterly and current reports and other
information with the SEC. These materials can be inspected and copied at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of these materials may also be obtained by mail at prescribed rates from
the SEC's Public Reference Room at the above address. Information about the
Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
18
The SEC also maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. The address of the SEC's Internet site is
http://www.sec.gov.
The Company makes available, free of charge, on its Internet website,
located at http://www.medical-action.com its most recent Annual Report on Form
10-K, its most recent Quarterly Report on Form 10-Q, any current reports on Form
8-K filed since the Company's most recent Annual Report on Form 10-K and any
amendments to such reports as soon as reasonably practicable following the
electronic filing of such report with the SEC. In addition, the Company provides
electronic or paper copies of its filings free of charge upon request.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The following factors, among others, could cause actual results to differ
materially from its content in forward-looking statements made in this report
and presented elsewhere be management from time-to-time. Such factors, among
others may have a material adverse affect on our business, financial condition,
and results of operations and you should carefully consider them. It is not
possible to predict or identify all such factors. Consequently, you should not
consider any such list be a complete statement of all our potential risks or
uncertainties. Because of these and other factors, past performance should not
be considered an indication of future performance.
THE COMPANY MAY BE UNABLE TO SUCCESSFULLY MANAGE GROWTH, PARTICULARLY IF
ACCOMPLISHED THROUGH ACQUISITIONS.
Successful implementation of the company's business strategy will require
that the company effectively manage any associated growth. To manage growth
effectively, the company's management will need to continue to implement changes
in certain aspects of the Company's business, to enhance the Company's
information systems and operations to respond to increased demand, to attract
and retain qualified personnel and to develop, train and manage an increasing
number of management-level and other employees. Growth could place an increasing
strain on the Company's management, financial, marketing, distribution and other
resources, and the Company could experience operating difficulties. Any failure
to manage growth effectively could have a material adverse affect on the
Company's results of operations and financial condition.
To the extent that the Company grows through acquisition, it will face the
additional challenges of integrating its current operations, culture,
informational management systems and other characteristics with that of the
acquired entity. The Company may incur significant expenses in connection with
negotiating and consummating one or more transactions, and it may inherit
certain liabilities in connection with the acquisition as a result of its
failure to conduct adequate due
19
diligence or otherwise. In addition, the Company may not realize competitive
advantages, synergies or other benefits anticipated in connection with such
acquisition. If the Company does not adequately identify targets for, or manage
issues related to our future acquisitions, such acquisitions may have a negative
adverse affect on the Company's business and financial results.
In addition to the above risks, future acquisitions may result in the
dilution of earnings and the amortization or write-off of goodwill and
intangible assets, any of which could have a material adverse affect on our
business, financial condition or results of operations.
WAR, TERRORISM OR PUBLIC HEALTH ISSUES COULD DISRUPT SUPPLY, DELIVERY OR DEMAND
OF PRODUCTS WHICH COULD NEGATIVELY AFFECT THE COMPANY'S OBLIGATIONS AND
PERFORMANCE.
War, terrorism or public health issues, whether in the U.S. or abroad, have
caused and could continue to cause damage or disruption to international
commerce by creating economic and political uncertainties that may have a strong
negative impact on the global economy, the Company, and the Company's suppliers
or customers. Although it is impossible to predict the occurrences or
consequences of any such events, such events could result in a decrease in
demand for the Company's products, make it difficult or impossible to deliver
products to its customers, or to receive components or raw materials from its
suppliers and could create delays and inefficiencies in the Company's supply
chain. The Company's operating results and financial statements could be in the
future adversely affected by these events.
Some of the Company's manufacturing vendors and component suppliers have
significant operations in various locations throughout Asia, including locations
in Mainland China, Taiwan, the Hong Kong Special Administrative Region and
Singapore, all of which were subject to the World Health Organization and Center
for Disease Control and Prevention severe acute respiratory syndrome (SARS)
travel advisories during fiscal 2004. Should the severity of the SARs threat
increase or other public health issues arise, the Company could be negatively
impacted by the need for more stringent employee travel restrictions, additional
limitations in the availability of freight services, governmental actions
limiting the movement of products between various regions, and disruptions in
the operations of the Company's manufacturing vendors and component suppliers.
The loss or non-renewal of any of the Company's group purchasing agreements
could hurt our business by reducing revenues and profitability. Hospital chains
and large buying groups have played, and are expected to continue to play, an
increasingly significant role in the purchase of medical devices. In 2003, group
purchasing organization ("GPO") purchasing accounted for approximately $28
billion of sales in the medical products industry. In recent
20
years, these groups have sought to narrow their list of suppliers. By acting as
a supplier to a GPO the Company can operate its sales force much more
efficiently. As a result, the Company's sales force continues to call on
facilities associated with these buying groups in order to improve compliance
with these group purchasing agreements and improve market share. These
agreements, which typically have no minimum purchase requirements, can be
terminated on ninety (90) days advance notice. The termination or non-renewal of
any of the agreements could cause a reduction in our sales through the loss of
sales to purchasers who determine not to purchase from the Company on their own,
which could result in a material adverse affect on our business and results of
operations.
FUTURE OPERATING RESULTS ARE DEPENDENT UPON THE COMPANY'S ABILITY TO OBTAIN A
SUFFICIENT SUPPLY OF RAW MATERIALS, SOME OF WHICH ARE AVAILABLE ONLY FROM
LIMITED SOURCES.
Although most raw materials essential to the Company's business are
generally available from multiple sources, certain key components (including
resin, which is used in the manufacture of collection systems for the
containment of medical waste) are currently obtained by the Company from limited
sources. If a supplier of significant raw materials including component parts,
finished goods or services were to terminate its relationship with the Company,
or otherwise cease supplying raw materials, component parts, finished goods or
services consistent with past practices, the Company's ability to meet its
obligations to its customers may be disrupted. A disruption with respect to
numerous products, or with respect to a few significant products, could have a
material adverse affect on the Company's business and financial condition.
Current general economic and political uncertainty has caused the cost of resin
to be extremely volatile. The inability of the Company to institute future price
increases as a result of its increased cost to obtain resin could also have an
adverse impact on the Company's results of operations and financial condition.
THE COST OF DESIGNING, IMPLEMENTING AND STAFFING AN EFFECTIVE CORPORATE
GOVERNANCE PROGRAM TO MEET CURRENT AND PROPOSED REGULATIONS COULD AFFECT THE
COMPANY'S FUTURE OPERATING RESULTS.
The corporate governance programs at the Company anticipated much of what
is included in the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). We had
standards in place for dealing with issues of compliance training, board
independence and made use of the lead director concept for committees of the
Board of Directors, and an audit committee financial expert. However, as part of
its continuing effort "to fill in the blanks" left by Congress, the SEC
implemented rules under Section 404 of Sarbanes-Oxley requiring the Company to
include in its annual report an internal control report which (i) confirms
management's obligation to establish and maintain adequate internal controls and
procedures for financial reporting and (ii) assess, as of year end, the
effectiveness of our internal controls and procedures for financial reporting.
In addition, Section 404
21
requires the Company's independent auditors to attest to, and report on,
management's assessment. Due to its broad scope of purpose, the time and expense
required to enable the Company to comply with Section 404 could be substantial
and affect the Company's profitability. In addition there is no assurance that
proposed rules such as enhanced shareholder access to the Company's proxy
materials, the expensing of stock options, and rules requiring expanded
disclosure Company's director nomination process and designation of an audit
committee financial expert will not have an adverse effect on the Company's
future operating results.
THE MARKET PRICE OF THE COMPANY'S COMMON STOCK HAS BEEN, AND MAY CONTINUE TO BE,
VOLATILE.
The market price of the Company's common stock has been, and may continue
to be, highly volatile for various reasons, including the following:
o the Company's announcement of new products, or similar announcements by its
competitors;
o quarter-to-quarter variances in the Company's financial results;
o claims involving potential infringement of patents and other intellectual
property rights;
o analyst and other projections or recommendations regarding the Company's
common stock or medical device stocks generally;
o any restatement of the Company's financial statements or any investigation
into the Company by the SEC or another regulatory authority;
o a general decline, or rise, of stock prices in the capital markets
generally; and
o investors concerns regarding the credibility of corporate financial
reporting and integrity of financial markets.
THE COMPANY QUARTERLY REVENUE AND OPERATING RESULTS MAY FLUCTUATE FOR A VARIETY
OF REASONS.
The Company's profit margins vary among its products and its distribution
channels. As a result, the overall profitability of the Company in any given
period will depend, in part, on the product, geographic, and channel mix
reflected in that period's net sales.
22
The Company's success depends largely on its ability to attract and retain key
personnel.
Much of the future success of the Company depends on the continued service
and availability of skilled personnel, including its Chief Executive Officer,
members of its executive team, and those in manufacturing, marketing and
information technology. The Company has relied on its ability to grant stock
options as one mechanism for recruiting and retaining this highly skilled
talent. Potential accounting regulations requiring the expensing of stock
options may impair the Company's future ability to provide these incentives
without incurring significant compensation costs. There can be no assurance that
the Company will continue to successfully attract and retain key personnel.
FAILURE OF THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS COULD ADVERSELY AFFECT
THE COMPANY'S FUTURE OPERATING RESULTS.
Information technology system failures could disrupt the Company's ability
to function in the normal course of business by potentially causing delays or
cancellation of customer orders, impeding the manufacture or shipment of
products, or resulting in the unintentional disclosure of customer or Company
information. Management has taken steps to address these concerns by its
implementation of internal control measures. However, there can be no assurance
that a system failure or data security breach will not have a material adverse
affect on the Company's results of operations.
CHANGES IN ACCOUNTING RULES COULD ADVERSELY AFFECT THE COMPANY'S FUTURE
OPERATING RESULTS.
Financial statements are prepared in accordance with U.S. generally
accepted accounting principles. These principles are subject to interpretation
by various governing bodies, including the FASB and the SEC, who interpret and
create appropriate accounting regulations. A change from current accounting
regulations can have a significant affect on the Company's results of operations
and could impact the manner in which the Company conducts business.
UNANTICIPATED CHANGES IN THE COMPANY'S TAX RATES COULD AFFECT ITS FUTURE
RESULTS.
The Company's future effective tax rates could be favorably or unfavorably
affected by unanticipated changes in tax laws or their interpretation. In
addition, the Company is subject to the continuous examination of our income tax
returns by the Internal Revenue Service and other tax authorities. The Company
regularly assesses the likelihood of adverse outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There
can be no assurance that the outcomes from these continuous examinations will
not have an adverse affect on its operating results and financial condition.
23
THE HIGH LEVEL OF COMPETITION IN OUR INDUSTRY PLACES PRESSURE ON OUR PROFIT
MARGINS AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The disposable medical device segment of the healthcare industry in which
we operate is highly competitive and is experiencing both horizontal and
vertical consolidation. All of the products which we sell are available from
sources other than us. The high level of competition in our industry places
pressure on profit margins. Some of our competitors have greater resources than
we have. These competitive pressures could have a material adverse affect on our
business, financial condition or results of operations.
Sales to the Company's three largest distributors (the "Distributors")
accounted for more than 60% of total sales in each of the last three fiscal
years. Although the Distributors may be deemed in a technical sense to be major
purchasers of the Company's products, the Distributors serve as a distributor
under a purchase order or supply agreement between the customer and the Company,
and do not purchase for their own accounts. The Company, therefore, does not
believe it is appropriate to categorize the Distributors as actual customers.
However, these Distributors compete with the Company on a private label basis,
and if successful, sales of certain of the Company's products may decline which
could result in a material affect on the Company's business and financial
condition.
THE COMPANY'S PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.
The Company's products are used in connection with surgical procedures and
in other medical contexts in which it is important that those products function
with precision and accuracy. If the Company's products do not function as
designed, or are designed improperly, the Company may be forced by regulatory
agencies to withdraw such products from the market. In addition, if medical
personnel or their patients suffer injury as a result of any failure of the
Company's products to function as designed, or an inappropriate design, the
Company may be subject to lawsuits seeking significant compensatory and punitive
damages. Any product recall or lawsuit seeking significant monetary damages may
have a material affect on the Company's business and financial condition.
A SIGNIFICANT ADVERSE CHANGE IN, OR FAILURE TO COMPLY WITH, GOVERNING
REGULATIONS COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS.
Substantially all the Company's products are "devices," as defined in the
Federal Food, Drug and Cosmetic Act ("FDA"), and the manufacture, distribution,
record keeping, labeling and advertisement of the Company's products is subject
to regulation by the FDA in the United States and its equivalent regulatory
agencies in various foreign countries in which the Company's products are
manufactured, distributed, labeled, offered and sold. Further, the Company is
24
subject to continual review and periodic inspections at its current facilities
with respect to the FDA's Good Manufacturing Practices. The Company's business
and financial condition could be adversely affected if it is found to be out of
compliance with governing regulations. In addition, if such regulations are
amended to become more restrictive and costly to comply with, the costs of
compliance could adversely affect the Company's business and financial
condition.
THE COMPANY IS SUBJECT TO WORK STOPPAGE, TRANSPORTATION AND RELATED RISKS.
The Company manufactures its products at various locations in the United
States and sells its products throughout the United States and other parts of
the world. The Company depends on third-party transportation companies to
deliver supplies necessary to manufacture our products from vendors to the
Company's various facilities and to move the Company's products to customers
within and outside the United States. The Company's manufacturing operations,
and the operations of the transportation companies on which the Company depends,
may be adversely affected by natural disasters and significant human events,
such as a war, terrorist attack, riot, strike, slowdown or similar event. Any
disruption in the Company's manufacturing or transportation could materially
adversely affect the Company's ability to meet customer demands or its
operations generally.
ITEM TWO - PROPERTIES
The Company owns (i) a 205,000 square foot manufacturing, warehouse and
distribution facility located on approximately 32 acres in Arden, North
Carolina, (ii) a 43,000 square foot manufacturing, warehouse and distribution
facility located on approximately 15 acres in Clarksburg, West Virginia and
(iii) a 12,000 square foot general office building on approximately 1.4 acres in
Hauppauge, New York. In addition, the Company leases 2,550 square feet of
general office space in Shanghai, China. Management believes that the Company's
facilities are adequate to meet its current needs and should continue to be
adequate for the foreseeable future. The Company presently does not occupy any
other facilities. Set forth below is a summary of the facilities owned by the
Company.
LOCATION PRIMARY USE SQUARE FEET
- -------- ----------- -----------
Arden, North Carolina Manufacturing/Warehouse/Distribution 205,000 (a)
Clarksburg, West Virginia Manufacturing/Warehouse/Distribution 43,000 (b)
Hauppauge, New York Executive Offices 12,000 (c)
Shanghai, China General Office 2,550 (d)
- -------------------------
(a) The principal manufacturing, distribution and warehouse facility of the
Company is located on premises, which the Company owns in Arden, North
Carolina. An Industrial Revenue Bond in the amount of $3,520,000 was
outstanding as of March 31, 2004, which was used to acquire and renovate
the facility and acquired certain manufacturing equipment.
(b) The Clarksburg, West Virginia facility was acquired by the Company in
October 2002 as part of its acquisition of the BioSafety Division of Maxxim
Medical, Inc.
(c) The Hauppauge, New York corporate offices were acquired by the Company in
July 2000.
(d) The Shanghai, China office is leased for the two (2) year period ending
January 31, 2006, at an annual rental of $62,000.00.
25
ITEM THREE - LEGAL PROCEEDINGS
The Company is a party to several lawsuits arising out of the conduct of
its business in the ordinary course. While the results of such lawsuits cannot
be predicted with certainty, management does not expect that the ultimate
liabilities, if any, will have a material adverse effect on the financial
position or results of operations of the Company.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
26
PART II
ITEM FIVE - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK-HOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The information required by this Item is set forth in registrant's 2004
Annual Report to Stockholders under the captions "Selected Financial Data" and
"Stock Trading" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations", which information is hereby incorporated herein by
reference.
ITEM SIX - SELECTED FINANCIAL DATA
The information required by this Item is set forth in registrant's 2004
Annual Report to Stockholders contained under the caption "Selected Financial
Data", which information is hereby incorporated herein by reference.
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is set forth in registrant's 2004
Annual Report to Stockholders contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
information is hereby incorporated herein by reference.
ITEM SEVEN (A) - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in registrant's 2004
Annual Report to Stockholders contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
information is hereby incorporated herein by reference.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in registrant's 2004
Annual Report to Stockholders under the captions "Reports of Independent
Certified Public Accountants", "Balance Sheets", "Statements of Earnings",
"Statement of Shareholders' Equity", "Statements of Cash Flows" and "Notes to
Financial Statements", which information is hereby incorporated herein by
reference.
ITEM NINE - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
ITEM NINE (A) - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within 90 days of the filing date of this
report. Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to
the Company required to be included in our reports filed or submitted under the
Exchange Act.
There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.
28
PART III
ITEM TEN, ELEVEN, TWELVE, THIRTEEN AND FOURTEEN
These items are incorporated by reference to the Company's definitive Proxy
Statement relating to the Annual Meeting of Shareholders scheduled for August 5,
2004. The definitive Proxy Statement will be filed with the Commission not later
than 120 days after March 31, 2004, pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended.
29
PART IV
ITEM FIFTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Medical Action Industries Inc.,
included in its Annual Report to Stockholders for the year ended March 31, 2004,
are incorporated by reference in Item 8:
Balance Sheets at March 31, 2004 and 2003
Statements of Earnings for the Years Ended March 31, 2004, 2003 and 2002
Statement of Shareholders' Equity for the Years Ended March 31, 2004, 2003
and 2002
Statements of Cash Flows for the Years Ended March 31, 2004, 2003 and 2002
Notes to Financial Statements
The following financial statement schedule and Report of Independent
Registered Public Accounting Firm of Medical Action Industries Inc. and
subsidiary is included in Item 14(d):
Report of Independent Registered Public Accounting Firm on Schedule II
Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(3) EXHIBITS:
EXHIBIT NO.
2.1 Agreement and Plan of Reorganization dated as of August 12, 1994
among Registrant, QuanTech Acquisition Corp. and QuanTech, Inc.
(Exhibit 2.1 to the Company's Annual Report on Form 10-K for the
year ended March 31, 1995).
30
2.2 Purchase Agreement dated as of January 30, 1996 among Registrant,
SBW Acquisition Corp., Lawson Mardon Medical Products, Inc. and
Lawson Mardon Medical Products, a trading division of Lawson Mardon
Packaging UK Ltd. (Exhibit 2 to the Company's Current Report on Form
8-K dated February 6, 1996).
2.3 Asset Purchase Agreement dated as of March 9, 1999 between Acme
United Corporation and Registrant (Exhibit 2 to the Company's
Current Report on Form 8-K dated April 1, 1999).
2.4 Asset Purchase Agreement dated as of October 3, 2001 between
Medi-Flex Hospital Products, Inc. and Registrant (Exhibit 2 to the
Company's Current Report on Form 8-K dated November 30, 2001).
2.5 Asset Purchase Agreement dated as of May 9, 2002 between MD
Industries Acquisition LLC and Registrant (Exhibit 2 to the
Company's current report on Form 8-K dated June 21, 2002).
2.6 Asset Purchased Agreement dated as of August 30, 2002, between
Maxxim Medical, Inc. and Registrant (Exhibit 2 to the Company's
current report on Form 8-K dated October 25, 2002.
3.1 Certificate of Incorporation, as amended. (Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended March 31,
2002)
3.2 By-Laws, as amended (Exhibit 3(b) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1988).
10.1 1996 Non-Employee Director Stock Option Plan (Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1997).
10.2 Restricted Management Stock Bonus Plan, as amended (Exhibit 10(b) to
the Company's Annual Report on Form 10-K for the year ended March
31, 1988).
10.3 1989 Non-Qualified Stock Option Plan, as amended. (Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended March
31, 2002)
10.4 1994 Stock Incentive Plan, as amended. (Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended March 31,
2002.)
31
10.5 Employment Agreement dated as of February 1, 1993 between the
Registrant and Paul D. Meringolo (Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1993).
10.6 Modification Agreement dated as of February 5, 1996 between the
Registrant and Paul D. Meringolo (Exhibit 10 to the Company's
Current Report on Form 8-K dated February 7, 1996).
10.7 Modification Agreement dated as of May 28, 1997 between the
Registrant and Paul D. Meringolo (Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997).
10.8 Modification Agreement dated as of July 21, 1999 between the
Registrant and Paul D. Meringolo (Exhibit 10 to the Company's
current report on Form 8-K dated July 30, 1999).
10.9 Modification Agreement dated as of May 31, 2000 between the
Registrant and Paul D. Meringolo (Exhibit 10 to the Company's
current report on Form 8-K dated June 5, 2000).
10.10 Modification Agreement dated as of June 3, 2003 between the
Registrant and Paul D. Meringolo (Exhibit 10 to the Company's
current report on Form 8-K dated June 3, 2003).
10.11 Revolving Credit Note and Agreement between the Registrant and a
lending institution dated as of October 21, 2002. (Exhibit 10 to the
Company's Current Report on Form 8-K dated October 25, 2002.
10.12 Change in Control Agreement dated as of June 1, 1995 between the
Registrant and certain executive officers (Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1995).
23.1* Consent of Registered Independent Public Accounting Firm
99.1* Additional Exhibit - Undertakings
99.2* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.3* Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act
of 2002
(B) REPORTS ON FORM 8-K:
None.
32
(C) EXHIBITS
The response to this portion of Item 16 is submitted as a separate section
of this report.
(D) FINANCIAL STATEMENT SCHEDULES
The response to this portion of Item 16 is submitted as a separate section
of this report.
- ----------------------
With the exception of the aforementioned information incorporated by
reference in this Annual Report on Form 10-K, the Company's Annual Report to
Stockholders for the year ended March 31, 2004 is not to be deemed "filed" as
part of this report.
*Filed herewith
33
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 10th day of
June, 2004.
MEDICAL ACTION INDUSTRIES INC.
By: /s/ Paul D. Meringolo
---------------------
Paul D. Meringolo
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on June 10, 2004 by the following persons in the
capacities indicated:
/s/ Paul D. Meringolo
- ------------------------------- Chief Executive Officer, President and
Paul D. Meringolo Director
/s/ Richard G. Satin
- ------------------------------- Vice President-Operations, General Counsel,
Richard G. Satin Corporate Secretary and Director
/s/ Bernard Wengrover
- ------------------------------- Director
Bernard Wengrover
/s/ Philip F. Corso
- ------------------------------- Director
Philip F. Corso
/s/ Thomas A. Nicosia
- ------------------------------- Director
Thomas A. Nicosia
34
Report of Independent Registered Public Accounting Firm on Schedule
To the Stockholders and Board of Directors of
Medical Action Industries Inc.
In connection with our audit of the financial statements of Medical Action
Industries Inc. referred to in our report dated May 21, 2004, which is included
in the Annual Report to Stockholders and incorporated by reference in Part II of
this form, we have also audited Schedule II for each of the three years in the
period ended March 31, 2004. In our opinion, this schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
New York, New York
May 21, 2004
35
S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
MEDICAL ACTION INDUSTRIES INC.
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
---------
ADDITIONS CHARGED TO OTHER
BALANCE AT CHARGED TO OTHER CHANGES - BALANCE
BEGINNING OF COSTS AND ACCOUNTS - ADD(DEDUCT) END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
Year ended March 31, 2004
Deducted from asset accounts:
Allowance for doubtful accounts $275,998 $51,000 (1)($32,437) $294,561
Reserve for slow moving and obsolete inventory $612,756 $203,792 (2)($431,548) $385,000
Total Valuation and Qualifying Accounts $888,754 $254,792 ($463,985) $679,561
Year ended March 31, 2003
Deducted from asset accounts:
Allowance for doubtful accounts $233,998 $42,000 $275,998
Reserve for slow moving and obsolete inventory $213,186 $399,570 612,756
Total Valuation and Qualifying Accounts $447,184 $441,570 - $888,754
-
Year ended March 31, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $192,998 $41,000 $233,998
Reserve for slow moving and obsolete inventory $241,187 ($28,001) $213,186
Total Valuation and Qualifying Accounts $434,185 $41,000 - ($28,001) $447,184
- -------------------
(1) Write off of uncollectible account.
(2) Disposal of slow moving and obsolete inventory.
- ------------------------------------------------------------------------------------------------------------------------------------
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
------------------
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
EXHIBIT INDEX
================================================================================
EXHIBIT NO.
23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
99.1 ADDITIONAL EXHIBIT - UNDERTAKINGS
99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
99.3 CERTIFICATION PURSUANT TO SECTION 302(A) OF THE SARBANES-OXLEY ACT
OF 2002
2