-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RJ5f8fZ78v0SXtIGxMMg1R7YoutgQ1BVPvTPyaCXrjgP7ozc1CiJBE04AKHAb4eG CriXIddbNeCZySlOXC3rAw== 0000950136-02-003167.txt : 20021113 0000950136-02-003167.hdr.sgml : 20021113 20021113102540 ACCESSION NUMBER: 0000950136-02-003167 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL ACTION INDUSTRIES INC CENTRAL INDEX KEY: 0000748270 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 112421849 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13251 FILM NUMBER: 02818697 BUSINESS ADDRESS: STREET 1: 800 PRIME PL CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162314600 MAIL ADDRESS: STREET 1: 150 MOTOR PKWY STREET 2: STE 205 CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-Q 1 file001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 COMMISSION FILE NUMBER 0-13251 MEDICAL ACTION INDUSTRIES INC. (Exact name of Registrant as specified in its charter) DELAWARE 11-2421849 (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 Prime Place, Hauppauge, New York 11788 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (631) 231-4600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 9,632,516 shares of common stock as of October 25, 2002. FORM 10-Q --------- CONTENTS --------
PAGE NO. ---- PART I - FINANCIAL INFORMATION --------------------- ITEM 1. Condensed Financial Statements Balance Sheets at September 30, 2002 (Unaudited) and March 31, 2002 3-4 Statements of Earnings for the Three Months ended September 30, 2002 and 2001 5 (Unaudited) Statements of Earnings for the Six Months ended September 30, 2002 and 2001 6 (Unaudited) Statements of Cash Flows for the Six Months ended September 30, 2002 and 2001 7 (Unaudited) Notes to Financial Statements (Unaudited) 8-11 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 12-16 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 16-17 ITEM 4. Procedures and Controls 18-19 PART II - OTHER INFORMATION -----------------
2 ITEM 1. - ------ MEDICAL ACTION INDUSTRIES INC. ----------------------------- BALANCE SHEETS -------------- (DOLLARS IN THOUSANDS) ASSETS ------
SEPTEMBER 30, MARCH 31, 2002 2002 ------------- --------- (UNAUDITED) CURRENT ASSETS: Cash $ 712 $ 785 Accounts receivable, less allowance for doubtful accounts of $255 at September 30, 2002 and $234 at March 31, 2002 9,283 7,847 Inventories 13,252 12,666 Prepaid expenses 636 333 Deferred income taxes 217 217 Other current assets 44 81 ------- ------- TOTAL CURRENT ASSETS: 24,144 21,929 Property, plant and equipment, net 9,876 9,691 Due from officers 382 382 Goodwill 25,185 16,553 Trademarks 596 569 Other intangible assets 322 351 Other assets 184 172 ------- ------- TOTAL ASSETS: $60,689 $49,647 ======= =======
The accompanying notes are an integral part of these financial statements. 3 ITEM 1. - ------- MEDICAL ACTION INDUSTRIES INC. ----------------------------- BALANCE SHEETS -------------- (DOLLARS IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------
SEPTEMBER 30, MARCH 31, 2002 2002 ------------- --------- (UNAUDITED) CURRENT LIABILITIES: Accounts payable $ 2,658 $ 2,434 Accrued expenses, payroll and payroll taxes 2,233 1,913 Accrued income taxes 82 20 Current portion of long-term debt 2,160 2,160 ------- ------- TOTAL CURRENT LIABILITIES: 7,133 6,527 Deferred income taxes 982 982 Long-term debt, less current portion 14,565 8,380 ------- ------- TOTAL LIABILITIES: 22,680 15,889 COMMITMENTS SHAREHOLDERS' EQUITY: Common stock 15,000,000 shares authorized, $.001 par value; issued and outstanding 9,624,766 shares at September 30, 2002 and 9,496,949 shares at March 31, 2002 10 9 Additional paid-in capital, net 11,640 11,002 Retained earnings 26,359 22,747 ------- ------- TOTAL SHAREHOLDERS' EQUITY: 38,009 33,758 ------- ------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY: $ 60,689 $49,647 ======== =======
The accompanying notes are an integral part of these financial statements. 4 ITEM 1. - ------- MEDICAL ACTION INDUSTRIES INC. ------------------------------ STATEMENT OF EARNINGS --------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2002 2001 ------------ ------------ Net sales $23,576 $20,855 Cost of sales 16,468 14,305 ------- ------- Gross profit 7,108 6,550 Selling, general and administrative expenses 4,126 3,924 Interest expense 120 55 Interest (income) (18) (21) ------- ------- come before income taxes 2,880 2,592 Income tax expense 1,091 1,002 ------- ------ Net income $ 1,789 $ 1,590 ======= ======= Net income per common share basic $ .19 $ .17 ======= ======= Net income per common share diluted $ .18 $ .16 ======= =======
The accompanying notes are an integral part of these financial statements. 5 ITEM 1. MEDICAL ACTION INDUSTRIES INC. ------------------------------ STATEMENT OF EARNINGS --------------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30, 2002 2001 ---------- ------------ Net sales $46,130 $40,944 Cost of sales 31,877 28,377 ------- ------- Gross profit 14,253 12,567 Selling, general and administrative expenses 8,293 7,679 Interest expense 170 139 Interest (income) (36) (39) ------- ------- Income before income taxes 5,826 4,788 Income tax expense 2,214 1,856 ------- ------- Net income $ 3,612 $ 2,932 ======= ======= Net income per common share basic $ .38 $ .32 ======= ======= Net income per common share diluted $ .35 $ .29 ======= =======
The accompanying notes are an integral part of these financial statements. 6 ITEM 1. MEDICAL ACTION INDUSTRIES INC. ------------------------------ STATEMENT OF CASH FLOW ---------------------- (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30, 2002 2001 -------- -------- OPERATING ACTIVITIES Net income $ 3,612 $ 2,932 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 590 509 Provision for doubtful accounts 21 21 Deferred compensation - 24 Gain on sale of property and equipment (1) - Changes in operating assets and liabilities: Accounts receivable (1,457) (2,022) Inventories 120 1,271 Prepaid expense and other current assets (266) (157) Other assets (44) 7 Accounts payable 224 435 Income taxes payable 548 852 Accrued expenses, payroll and payroll taxes 320 (68) ------- ------- Net cash provided by operating activities 3,667 3,804 ------- ------- INVESTING ACTIVITIES Acquisition of business (9,527) - Principal payment received for loans to officers - 1 Purchase of property, plant and equipment (557) (303) Proceeds from sale of property and equipment 6 - ------- ------- Net cash used in investing activities (10,078) (301) ------- ------- FINANCING ACTIVITIES Proceeds from revolving line of credit and long term borrowings 10,865 775 Principal payments on revolving line of credit, long term debt, and capital lease obligations (4,680) (3,752) Repurchases of company common stock (334) (1,333) Proceeds from exercise of employee stock options 487 389 ------- ------- Net cash provided by (used in) financing activities 6,338 (3,921) ------- ------- Decrease in cash (73) (418) Cash at beginning of year 785 639 ------- ------- Cash at end of period $ 712 $ 221 ======= =======
The accompanying notes are an integral part of these financial statements 7 ITEM 1. - ------- MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY --------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information and with the instructions to Form 10-Q for quarterly reports under section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six (6) month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended March 31, 2003. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report for the year ended March 31, 2002. NOTE 2. INVENTORIES Inventories, which are stated at the lower of cost (first-in, first-out) or market, consist of the following: SEPTEMBER 30, MARCH 31, 2002 2002 ------------- --------- (unaudited) (in thousands of dollars) Finished Goods $5,994 $6,049 Work in Process 65 - Raw Materials 7,193 6,617 ------ ------ Total $ 13,252 $ 12,666 ======== ======== NOTE 3. NET INCOME PER SHARE Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share is based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average prices during the periods. Excluded from the calculation of earnings per share are options and warrants to purchase 336,000 shares and 80,000 shares for the three and six months ended September 30, 2002 and September 30, 2001 respectively, as their inclusion would not have been dilutive. The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended September 30, 2002 and for the three and six months ended September 30, 2001. 8 ITEM 1. - ------- MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY --------------------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (UNAUDITED) NOTE 3. (continued)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ---- ---- ---- ---- (dollars in thousands except per share data) NUMERATOR: - ---------- Net income for basic and dilutive earnings per share $1,789 $1,590 $ 3,612 $2,932 ====== ====== ======= ====== DENOMINATOR: - ------------ Denominator for basic earnings per share - weighted average shares 9,526,233 9,136,994 9,510,057 9,121,523 --------- --------- --------- --------- Effect of dilutive securities Employee and director stock options 651,622 1,011,166 666,841 861,119 Warrants 10,399 45,942 10,540 52,957 ------ ------ ------ ------ Dilutive potential common shares 662,021 1,057,108 677,381 914,076 ------- --------- ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares 10,188,254 10,194,102 10,187,438 10,035,599 ========== ========== ========== ========== Basic earnings per share $.19 $.17 $.38 $.32 ==== ==== ==== ==== Diluted earnings per share $.18 $.16 $.35 $.29 ==== ==== ==== ====
NOTE 4. STOCKHOLDERS' EQUITY For the three and six months ended September 30, 2002, 122,000 and 153,250 stock options were exercised by employees and directors of the Company in accordance with the Company's 1989 Non-Qualified Stock Option Plan, the 1994 Stock Incentive Plan, and the Company's 1996 Non-Employee Director Stock Option Plan, respectively. The exercise price of the options exercised ranged from $2.09 per share to $4.00 per share, the net cash proceeds from these exercises were $391,000 for the three months ended September 30, 2002 and $487,000 for the six months ended September 30, 2002. 9 ITEM 1. NOTE 5. ACQUISITION On June 21, 2002, the Company acquired certain assets relating to the specialty packaging and collection systems for the containment of infectious waste and sterilization products business of MD Industries of Northbrook, Illinois ("MD Industries"). The purchase price for the assets acquired was approximately $9,527,000 including acquisition costs, all of which was paid at closing. The assets acquired included inventory, certain fixed assets and trademarks used in the operations of the specialty packaging and collection systems for the containment of infectious waste and sterilization products (hereinafter the "Products"). The acquisition of the MD Industries business has been accounted for as a purchase pursuant to Statement No. 141 as issued by the Financial Accounting Standards Board. The operations of MD Industries have been included in the Company's statement of earnings since the acquisition date. Historical pro forma information as if this acquisition occurred at the beginning of all periods presented is not available. The following table summarizes the assets acquired from MD Industries and the preliminary allocation of the purchase price: Inventory $ 706,000 Factory and office equipment 162,000 Goodwill 8,632,000 Trademarks 27,000 ---------- $9,527,000 MD Industries sold its line of specialty packaging and collection systems for the containment of infectious waste and sterilization products. The Company sold specialty packaging and collection systems for the containment of infectious waste and sterilization products prior to the acquisition. Essentially, the acquisition increased the Company's market share in these products, while gaining operational efficiencies and the benefit of increased purchasing power and lower material costs. As a result of the acquisition, the Company has projected approximately $7.0 million of incremental sales to its existing customers of specialty packaging and collection systems for the containment of infectious waste and sterilization products with limited additional selling and general administrative expenses. The aforementioned were the primary reasons for the acquisition and the main factors that contributed to the purchase price and which resulted in the recognition of goodwill. For tax purposes, the goodwill will be deductible. Goodwill and the trademarks will be tested for impairment periodically, in accordance with Statement No. 142 as issued by the Financial Accounting Standards Board. The Company utilized the funds available under its existing Revolving Credit Note and Loan Agreement in order to satisfy the purchase price. The purchase price allocation is subject to certain adjustments, none of which is anticipated to be material, because the valuation of the assets and acquisition costs have not been finalized. 10 ITEM 1. - ------- NOTE 6. SUBSEQUENT EVENTS On October 25, 2002, the Company acquired certain assets relating to the BioSafety Division of Maxxim Medical, Inc. of Waltham, Massachusetts. The BioSafety Division, which maintains a manufacturing facility in Clarksburg, West Virginia, consists of specialty packaging and collection systems for the containment of infectious waste and a line of sharps containment systems. The purchase price for the assets acquired was approximately $20,500,000, of which $19,500,000 was paid at closing. An amount of up to $1,000,000 is payable on February 15, 2003 subject to certain performance levels of the acquired business. The assets acquired included inventory, the land and manufacturing facility in Clarksburg, West Virginia, certain fixed assets, a non competition agreement, a supply agreement and intellectual property used in the operations of the BioSafety Division. The acquisition of the BioSafety division of Maxxim Medical, Inc. will be accounted for as a purchase pursuant to Statement No. 141 as issued by the Financial Accounting Standards Board. The Company utilized funds under the credit agreement dated as of October 21, 2002 in order to satisfy the purchase price. On October 21, 2002 the Company entered into a credit agreement with certain lenders and a bank acting as administration agent for the lenders. The agreement replaces the sixth amended and restated Revolving Credit Note and Agreement dated June 18, 2002 with its previous bank. The Credit Agreement provides for borrowing of $40,000,000 and is divided into two types of borrowing facilities, (i) a term loan with a principal amount of $25,000,000 which is payable in twenty consecutive equal quarterly installments commencing on December 31, 2002. The term note shall bear interest from inception on the unpaid principal at the applicable interest rate. (ii) Revolving credit loans, which amounts may be borrowed, repaid and reborrowed up to $15,000,000. The revolving credit agreement expires on September 30, 2005. The revolving credit loans shall bear interest from inception on the unpaid principal at the applicable interest rate. The applicable interest rate for both the term loan and revolving credit loans shall equal the "alternate base rate" plus the applicable margin or at the Company's option the "LIBOR rate" plus the "applicable margin". The applicable base rate shall mean a rate per annum equal to the greater of (a) the Prime rate or (b) the Federal Funds effective rate in effect on such day plus 1/2 of 1%. "Applicable Margin" shall mean with respect to LIBOR loans a range of 225 basis points to 325 basis points, with respect to Alternate base rate loans, the applicable margin shall range from 0 basis points to 325 basis points. The rates for both LIBOR and Alternate base rate loans are established quarterly based upon agreed upon financial ratios. Borrowings on the revolving credit loans is further limited to 80% of eligible accounts receivable, and 55% of eligible inventory, as defined, with a sublimit of $7,500,000. Borrowings under this agreement are collateralized by all the assets of the Company, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of liens, guarantees, mergers, acquisitions, capital expenditures, specified sales of assets and prohibits the payment of dividends. The Company is also required to maintain various financial ratios which will be measured quarterly. 11 ITEM 1. - ------- NOTE 7. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This statement eliminates the current requirements that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified as extraordinary items only if they are deemed to be unusual and infrequent, in accordance with the current GAAP criteria for extraordinary classifications. In addition, SFAS NO. 145 eliminates an inconsistency in lease accounting by requiring that modifications of capital leases that result in reclassification as operating leases be accounted for consistent with sales-leaseback accounting rules. The statement also contains other nonsubstantive corrections to authoritative accounting literature. The rescission of SFAS No. 4 is effective in fiscal years beginning after May 15, 2002. The amendment and technical corrections are SFAS No. 13 are effective for financial statements issued on or after May 15, 2002. Management believes that the adoption of SFAS No. 145 will not have a material impact on its results of operations or financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Management believes that the adoption of SFAS No. 146 will not have a material impact on its results of operations or financial position. 12 ITEM 2. - ------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- FORWARD-LOOKING STATEMENT - ------------------------- This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the future economic performance and financial results of the Company. The forward-looking statements relate to (i) the expansion of the Company's market share, (ii) the Company's growth into new markets, (iii) the development of new products and product lines to appeal to the needs of the Company's customers, (iv) the procurement of export visas for raw materials for operating room towels from China, which may impact the availability and pricing of operating room towels, and (v) the retention of the Company's earnings for use in the operation and expansion of the Company's business. Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation throughout the healthcare supply chain, the impact of healthcare reform, opportunities for acquisitions and the Company's ability to effectively integrate acquired companies, the ability of the Company to maintain its gross profit margins, the ability to obtain additional financing to expand the Company's business, the failure of the Company to successfully compete with the Company's competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company's filings with the Securities and Exchange Commission, which include this report on Form 10-Q and the Company's annual report on Form 10-K for the year ended March 31, 2002. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. RESULTS OF OPERATIONS - --------------------- SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 2001 - ---------------------------------------------------------------- Net sales for the six months ended September 30, 2002 increased 13% to $46,130,000 from $40,944,000 for the six months ended September 30, 2001. The increase in net sales was primarily attributable to a $2,498,000, or 119% increase in net sales of the collection systems/biohazardous bags, a $5,809,000 or 141% increase in net sales of small kits and trays, a $1,021,000 increase in net sales of patient aids and a $945,000 increase in net sales of non-woven products. These increases were partially offset by a $2,141,000 or 20% decrease in net sales of laparotomy sponges and a $2,485,000 or 20% decrease in net sales of operating room towels. Management believes that the increase in net sales of the collection 13 ITEM 2. - ------- systems/biohazardous bags product line was primarily due to net sales of approximately $2,317,000 of collection systems/biohazardous bags products acquired from MD Industries on June 21, 2002 and greater domestic market penetration. Net sales of small kits and trays increased primarily due to net sales of approximately $5,153,000 of small kit and tray products acquired from Medi-Flex on November 30, 2001 and greater domestic market penetration. Net sales of non-woven products and patient aids was primarily due to greater market penetration. Unit sales of laparotomy sponges decreased by 18% and average selling prices decreased 3%. Unit sales of operating room towels decreased 9% and average selling prices decreased 12%. Management believes that the decrease in unit sales of laparotomy sponges and operating room towels was primarily due to increased competition in the domestic market. The Company obtains a portion of its raw materials for operating room towels from the People's Republic of China. These operating room towel were designated as textile, for which an export visa is required. However, with the admission of the People's Republic of China into the World Trade Organization ("WTO"), export visas for operating room towels are no longer required. As a result, the Company believes that sales of the product will become more competitive and average selling prices will decline during fiscal 2003. In addition, the Company believes that it will be able to maintain its gross margin dollars as a percentage of net sales for these products. Gross profit for the six months ended September 30, 2002 increased 13% to $14,253,000 from $12,567,000 for the six months ended September 30, 2001. Gross profits as a percentage of net sales for the six months ended September 30, 2002 and 2001 was 31% of net sales. The increase in gross profit dollars was primarily attributable to the increase in net sales. Selling, general and administrative expenses for the six months ended September 30, 2002 increased 8% to $8,293,000 from $7,679,000 for the six months ended September 30, 2001. As a percentage of net sales, selling, general and administrative expenses decreased to 18% for the six months ended September 30, 2002 from 19% for the six months ended September 30, 2001. The increase in selling, general and administrative expense dollars was primarily attributable to increased selling expenses associated with achieving higher sales and increased administrative costs associated with the MD Industries and Medi- Flex acquisitions. Interest expense for the six months ended September 30, 2002 increased 22% to $170,000 from $139,000 for the six months ended September 30, 2001. The increase in interest expense was attributable to an increase in the average principal loan balances during the six months ended September 30, 2002, as compared to the six months ended September 30, 2001. The increase in principal loan balances outstanding was primarily attributable to the MD Industries acquisition on June 21, 2002. Net income for the six months ended September 30, 2002 increased to $3,612,000 from $2,932,000 for the six months ended September 30, 2001. The increase in net income is attributable to the aforementioned increase in net sales and gross profit, which were partially offset by an increase in selling, general and administrative expenses and interest expense. 14 ITEM 2. - ------- THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 - -------------------------------------------------------------------- Net sales for the three months ended September 30, 2002 increased 13% to $23,576,000 from $20,855,000 for the three months ended September 30, 2001. The increase in net sales was primarily attributed to a $2,735,000 or 126% increase in net sales of small kits and trays, a $2,286,000 or 210% increase in net sales of the collection systems/biohazardous bags product line, a $232,000 increase in net sales of non-woven products and a $701,000 increase in net sales of patient aids. These increases were partially offset by a $1,279,000 or 24% decrease in net sales of laparotomy sponges and a $1,903,000 or 29% decrease in net sales of operating room towels. Management believes that the increase in net sales of small kits and trays was primarily due to net sales of approximately $2,480,000 of small kits and tray products acquired from Medi-Flex on November 30, 2001. Net sales of collection systems/biohazardous bags increased primarily due to $2,224,000 of sales of products acquired from MD Industries on June 21, 2002. Net sales of non-woven products and patient aids was primarily due to greater domestic market penetration. Unit sales of laparotomy sponges decreased by 20% and average selling prices decreased by 5%. Unit sales of operating room towels decreased by 15% and average selling prices decreased by 16%. Management believes that the decrease in unit sales and average selling prices of laparotomy sponges and operating room towels was primarily due to increased competition in the domestic market. The Company obtains a portion of its raw materials for operating room towels from the People's Republic of China. These operating room towels were designated as textile, for which an export visa is required. However, with the admission of the People's Republic of China into the World Trade Organization ("WTO"), export visas for operating room towels are no longer required. As a result, the Company believes that sales of the product will become more competitive and average selling prices will decline during fiscal 2003. In addition, the Company believes that it will be able to maintain its gross margin dollars as a percentage of net sales for these products. Gross profit for the three months ended September 30, 2002 increased 9% to $7,108,000 from $6,550,000 for the three months ended September 30, 2002. Gross profit as a percentage of net sales for the three months ended September 30, 2002 decreased to 30% of net sales from 31% of net sales for the three months ended September 30, 2001. The increase in gross profit dollars was primarily attributable to the increase in net sales. The decrease in gross margin as a percentage of sales was primarily attributed to a change in the sales mix from fiscal 2001. The change in sales mix more than offset lower raw material costs and increased manufacturing efficiencies. Selling, general and administrative expenses for the three months ended September 30, 2002 increased 5% to $4,126,000 from $3,924,000 for the three months ended September 30, 2001. As a percentage of net sales, selling, general and administrative expenses decreased to 18% for the three months ended September 30, 2002 from 19% for the three months ended September 30, 2001. The increase in selling, general and administrative expense dollars was primarily attributable to increased shipping expenses associated with achieving higher sales and increased administrative expenses to support the MD Industries acquisition which was completed on June 21, 2002. Interest expense for the three months ended September 30, 2002 increased 118% to $120,000 from $55,000 for the three months ended September 30, 2001. The increase in interest expense was 15 ITEM 2. - ------- attributable to an increase in the average principal loan balances and interest rates during the quarter ended September 30, 2002, as compared to the quarter ended September 30, 2001. The increase in the average principal loan balances outstanding was primarily attributable to the MD Industries acquisition on June 21, 2002. Net income for the three months ended September 30, 2002 increased to $1,789,000 from $1,590,000 for the three months ended September 30, 2001. The increase in net income is attributable to the aforementioned increase in net sales and gross profit, which were partially offset by an increase in selling, general and administrative expenses and interest expense. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company had working capital of $17,011,000 with a current ratio of 3.4 to 1 at September 30, 2002 as compared to working capital of $15,402,000 with a current ratio of 3.4 to 1 at March 31, 2002. Total borrowings outstanding, including Industrial Revenue Bonds of $4,060,000, were $16,725,000 with a debt to equity ratio of .44 to 1 at September 30, 2002 as compared to $10,540,000 with a debt to equity ratio of .31 to 1 at March 31, 2002. The increase in total borrowings outstanding at September 30, 2002 was primarily attributable to the utilization of funds under the Company's existing credit facilities to purchase certain assets relating to the collection systems for the containment of infectious waste and sterilization products business of MD Industries on June 21, 2002. The Company has financed its operations primarily through cash flow from operations and borrowings from its existing credit facilities. At September 30, 2002, the Company had a cash balance of $712,000 compared to $785,000 at March 31, 2002. The Company's operating activities provided cash of $3,667,000 for the six (6) months ended September 30, 2002 as compared to $3,804,000 provided for the six (6) months ended September 30, 2001. Net cash provided for the six (6) months ended September 30, 2002 consisted primarily of net income from operations, depreciation, amortization, increases in income taxes payable and increases in accrued expenses, payroll and payroll taxes. These sources of cash more than offset the increase in accounts receivable associated with increased sales, and increases in prepaid expenses and other current assets. Investing activities used net cash of $10,078,000 and $301,000 for the six (6) months ended September 30, 2002 and September 30, 2001, respectively. The principal uses for the six (6) months ended September 30, 2002 was for the purchase of certain assets relating to the collecting systems for the containment of infectious waste and sterilization products business of MD Industries on June 21, 2002. The purchase price and related acquisition costs for the MD Industries business was approximately $9,527,000. Financing activities provided cash of $6,338,000 for the six (6) months ended September 30, 2002 compared to $3,921,000 used for the six (6) months ended September 30, 2001. Financing activities consisted of borrowings under the Company's existing credit facility of $10,865,000, principally to finance the acquisition of certain assets of MD Industries, offset by principal payments of $4,682,000. Other financing activities include cash proceeds from the exercise of stock options of $487,000 and $334,000 used for the repurchase of the Company's common stock. 16 ITEM 2. - ------- On October 25, 2002, the Company acquired certain assets relating to the BioSafety Division of Maxxim Medical, Inc. of Waltham, Massachusetts. The BioSafety Division, which maintains a manufacturing facility in Clarksburg, West Virginia, consists of specialty packaging and collection systems for the containment of infectious waste and a line of sharps containment systems. The purchase price for the assets acquired was approximately $20,500,000, of which $19,500,000 was paid at closing. An amount of up to $1,000,000 is payable on February 15, 2003 subject to certain performance levels of the acquired business. The assets acquired included inventory, the land and manufacturing facility in Clarksburg, West Virginia, certain fixed assets, a non competition agreement, a supply agreement and intellectual property used in the operations of the BioSafety Division. The acquisition of the BioSafety division of Maxxim Medical, Inc. will be accounted for as a purchase pursuant to Statement No. 141 as issued by the Financial Accounting Standards Board. The Company utilized funds under the credit agreement dated as of October 21, 2002 in order to satisfy the purchase price. On October 21, 2002 the Company entered into a credit agreement with certain lenders and a bank acting as administration agent for the lenders. The agreement which replaces the sixth amended and restated Revolving Credit Note and Agreement dated June 18, 2002 with its previous bank. The Credit Agreement provides for borrowing of $40,000,000 and is divided into two types of borrowing facilities, (i) a term loan with a principal amount of $25,000,000 which is payable in twenty consecutive equal quarterly installments commencing on December 31, 2002. The term note shall bear interest from inception on the unpaid principal at the applicable interest rate. (ii) Revolving credit loans, which amounts may be borrowed, repaid and reborrowed up to $15,000,000. The revolving credit agreement expires on September 30, 2005. The revolving credit loans shall bear interest from inception on the unpaid principal at the applicable interest rate. The applicable interest rate for both the term loan and revolving credit loans shall equal the "alternate base rate" plus the applicable margin or at the Company's option the "LIBOR rate" plus the "applicable margin". The applicable base rate shall mean a rate per annum equal to the greater of (a) the Prime rate or (b) the Federal Funds effective rate in effect on such day plus 1/2 of 1%. "Applicable Margin" shall mean with respect to LIBOR loans a range of 225 basis points to 325 basis points, with respect to Alternate base rate loans, the applicable margin shall range from 0 basis points to 325 basis points. The rates for both LIBOR and Alternate base rate loans are established quarterly based upon agreed upon financial ratios. Borrowings on the revolving credit loans is further limited to 80% of eligible accounts receivable, and 55% of eligible inventory, as defined, with a sublimit of $7,500,000. Borrowings under this agreement are collateralized by all the assets of the Company, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of liens, guarantees, mergers, acquisitions, capital expenditures, specified sales of assets and prohibits the payment of dividends. The Company is also required to maintain various financial ratios which will be measured quarterly. At September 30, 2002, the Company had no material commitments for capital expenditures. 17 ITEM 2. - ------- The Company believes that the anticipated future cash flow from operations, coupled with its cash on hand and available funds under its revolving credit agreements, will be sufficient to meet working capital requirements. ITEM 3. - ------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ---------------------------------------------------------- The Company is exposed to interest rate change market risk with respect to its credit facility with a financial institution which is priced based on the prime rate of interest plus a spread of up to 1/4%, LIBOR rate plus a spread of up to 2 1/2%, or at 1 1/4% over the prevailing bankers' acceptance rate. The spread over prime and LIBOR rates is determined based upon the Company's performance with regard to agreed upon financial ratios. The Company decides at its sole discretion as to whether borrowings will be at prime, LIBOR or bankers' acceptance rates. At September 30, 2002, $12,665,000 was outstanding under the credit facility. Changes in the prime rate, LIBOR rates or bankers' acceptance rates during fiscal 2003 will have a positive or negative effect on the Company's interest expense. Each 1% fluctuation in the interest rate will increase or decrease interest expense for the Company by approximately $127,000 on an annualized basis. In addition, the Company is exposed to interest rate change market risk with respect to the proceeds received from the issuance and sale by the Buncombe County Industrial and Pollution Control Financing Authority Industrial Development Revenue Bonds. At September 30, 2002, $4,060,000 was outstanding for these Bonds. The Bonds bear interest at a variable rate determined weekly. During the quarter ended September 30, 2002, the interest rate on the Bonds approximated 1.5%. Each 1% fluctuation in interest rates will increase or decrease interest expense on the Bonds by approximately $41,000 on an annualized basis. A significant portion of the Company's raw materials is purchased from China and to a lesser extent from India. All such purchases are transacted in U.S. dollars. The Company's financial results, therefore, could be impacted by factors such as changes in foreign currency, exchange rates or weak economic conditions in foreign countries in the procurement of such raw materials. To date, sales of the Company's products outside the United States have not been significant. ITEM 4. - ------- PROCEDURES AND CONTROLS - ----------------------- Within the 90 days prior to the date of this report, Medical Action Industries Inc. carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 18 MEDICAL ACTION INDUSTRIES INC. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings There are no material legal proceedings against the Company or in which any of its property is subject. ITEM 2. Changes in Securities None ITEM 3. Defaults upon Senior Securities None ITEM 4 Submission of Matters to a Vote of Security Holders A. The Registrant held its Annual Meeting of Stockholders on August 15, 2002 B. One Director was elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2005. The name of the Director and votes cast in favor of his election and share withheld are as follows: Name Votes for Votes Withheld ---- --------- -------------- Dr. Philip F. Corso 7,245,906 1,067,380 C. The stockholders also approved a proposal to ratify the appointment of Grant Thornton LLP as independent certified public accountants of the Company for the fiscal year ended March 31, 2003; 8,216,486 shares voted in favor of the proposal, 80,129 shares voted against the 16,621 shares abstained from voting. ITEM 5. Other Information None ITEM 6. (a) Exhibits and Reports on Form 8-K 99 - Certification pursuant to 18 U.S.C.ss.1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDICAL ACTION INDUSTRIES INC. Dated: November 13, 2002 By: /s/ Richard G. Satin ----------------- -------------------- Richard G. Satin, Principal Financial Officer, Vice President of Operations and General Counsel 2 EX-99 3 file002.txt CERTIFICATION PURSUANT TO 18 U.S.C. EXHIBIT 99 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Medical Action Industries Inc. (the "Company") for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, Paul D. Meringolo, Chief Executive Officer, Chairman of the Board and President and Richard G. Satin, Principal Financial Officer, Vice President of Operations and General Counsel of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Paul D. Meringolo /s/ Richard G. Satin - ----------------------------------------- ---------------------------- Chief Executive Officer, Chairman of the Principal Financial Officer, Board and President Vice President of Operations and General Counsel Date: November 13, 2002 Date: November 13, 2002 ------------------------------------ ---------------------------- CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 302(A) I, Paul D. Meringolo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Medical Action Industries, Inc. (the "Registrant"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or person performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 ----------------- /s/ Paul D. Meringolo - -------------------------------------------------- Paul D. Meringolo Chief Executive Officer, Chairman of the Board and President CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 302(A) I, Richard G. Satin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Medical Action Industries, Inc. (the "Registrant"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or person performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 ----------------- /s/ Richard G. Satin - ---------------------------- Richard G. Satin Principal Financial Officer Vice President-Operations and General Counsel -----END PRIVACY-ENHANCED MESSAGE-----