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 DECEMBER 31, 1997
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.)
150 Motor Parkway, Hauppauge, New York 11788
(Address of Principal executive offices)
Registrant's telephone number, including area code:
(516)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. 8,335,164 shares of
common stock as of January 31, 1998.
Form 10-Q
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CONTENTS
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Balance Sheets at December 31, 1997 (Unaudited) and March 31,
1997
Statements of Income for the Three and Nine Months ended
December 31, 1997 and December 31, 1996 (Unaudited)
Statements of Cash Flows for the Nine Months ended December
31, 1997 and December 31, 1996 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
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2
MEDICAL ACTION INDUSTRIES INC.
------------------------------
Balance Sheets
--------------
(dollars in thousands)
ASSETS
December 31, March 31,
1997 1997
----------- ---------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,104 $ 275
Accounts receivable, less allowance for
doubtful accounts of $133 at December 31,
1997 and $112 at March 31, 1997 6,754 6,065
Inventories 10,504 11,035
Prepaid expenses 483 237
Other current assets 167 247
------- -------
TOTAL CURRENT ASSETS 19,012 17,859
Property and equipment at cost, less
accumulated depreciation of $3,738
at December 31, 1997 and $4,297 at
March 31, 1997 7,783 4,024
Investment in Joint Ventures 431 495
Due from Officers 247 195
Excess of cost over net assets
acquired, less accumulated
amortization of $458 at December 31,
1997 and $355 at March 31, 1997 2,251 2,315
Other assets 137 106
-------- -------
TOTAL ASSETS $29,861 $24,994
======== =======
The accompanying notes are an integral part of these financial statements.
3
MEDICAL ACTION INDUSTRIES INC.
------------------------------
Balance Sheets
--------------
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
December 31, March 31,
1997 1997
----------- ---------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 1,493 $ 1,723
Accrued expenses, payroll and payroll taxes 1,167 482
Accrued income taxes 126 14
Current portion of capital lease obligations 128 131
Notes payable to bank 5,630 3,954
Current portion of long-term debt 240 1,327
------- -------
TOTAL CURRENT LIABILITIES 8,784 7,631
Deferred Income Taxes 386 386
Capital lease obligation, less
current portion 434 524
Long-term debt, less current
portion 5,398 3,035
------- -------
TOTAL LIABILITIES $15,002 $11,576
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized,
$.001 par value; issued and outstanding
8,330,164 shares at December 31, 1997
and 8,230,289 shares at March 31, 1997 8 8
Additional paid-in capital, net of
deferred compensation of $227 at
December 31, 1997 and $296
at March 31, 1997 8,409 8,179
Retained earnings 6,442 5,231
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TOTAL SHAREHOLDERS' EQUITY 14,859 13,418
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,861 $24,994
======= =======
The accompanying notes are an integral part of these financial statements.
4
MEDICAL ACTION INDUSTRIES INC.
------------------------------
Statements of Income
--------------------
(dollars in thousands except per share data)
Three Months Ended
December 31,
1997 1996
(Unaudited) (Unaudited)
----------- ------------
Net Sales $14,024 $11,212
Cost of Sales 10,853 8,866
-------- -------
Gross Profit 3,171 2,346
Selling, general and administrative
expenses 2,294 1,806
Interest expense, net 143 175
------- -------
Income before income taxes 734 365
Income tax expense 301 150
------- -------
Net income $ 433 $ 215
======= =======
Net Income per share basic
and diluted $ .05 $ .03
======== =======
The accompanying notes are an integral part of these financial statements.
5
MEDICAL ACTION INDUSTRIES INC.
------------------------------
Statements of Income
--------------------
(dollars in thousands except per share data)
Nine Months Ended
December 31,
1997 1996
---------- -----------
(Unaudited) (Unaudited)
Net Sales $40,777 $33,580
Cost of Sales 31,565 26,553
--------- --------
Gross Profit 9,212 7,027
Selling, general and administrative
expenses 6,419 5,453
Interest expense, net 466 463
Restructuring charge 273 --
------ -------
Income before income taxes 2,054 1,111
Income tax expense 843 463
------ -------
Net Income $1,211 $ 648
====== =======
Net Income per share basic $ .15 $ .08
====== =======
Net Income per share diluted $ .14 $ .08
====== =======
The accompanying notes are an integral part of these financial statements.
6
MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
Statement of Cash Flows
(dollars in thousands)
Nine Months Ended
December 31,
1997 1996
----------- -----------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net Income $ 1,211 $ 648
Adjustments to reconcile net income
to net cash provided by
operating activities:
Loss from sale of property
and equipment 61 --
Depreciation and amortization 570 512
Provision for doubtful accounts 21 (14)
Deferred compensation 91 109
Changes in operating assets and liabilities
net of acquisition:
Accounts Receivable (407) 758
Inventories 753 (1,554)
Prepaid expenses and other current assets (159) 95
Other assets (26) (9)
Accounts payable (416) (60)
Accrued income taxes 112 (112)
Accrued expenses, payroll and
payroll taxes 667 (169)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES $2,478 $ 204
INVESTING ACTIVITIES
Purchase price and related acquisition
costs (40) (163)
Purchase of property, plant and equipment (5,540) --
Proceeds from sale of property
and equipment 1,336 --
Loan to officers (52) (147)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (4,296) (310)
FINANCING ACTIVITIES
Proceeds from revolving line of
credit and long-term borrowings 8,484 2,442
Principal payments on revolving line of
credit, long-term debt, and capital
lease obligations (5,977) (2,444)
Proceeds from exercise of employee
stock options 140 3
------ -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,647 1
------ -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 829 (105)
Cash at beginning of period 275 504
------ -------
Cash and cash equivalents at end of period $ 1,104 $ 399
====== =======
The accompanying notes are an integral part of these financial statements.
7
MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended December 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended March 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report for the year ended March 31, 1997.
Note 2. INVENTORIES
Inventories, which are stated at the lower of cost (first-in, first-out) or
market, consist of the following:
December 31 March 31,
1997 1997
------------ ----------
(Unaudited)
Finished Goods $ 4,105 $ 4,491
Work in Process 125 0
Raw Materials 6,274 6,544
------- -------
Total $10,504 $11,035
======= =======
Note 3. SIGNIFICANT EVENTS
On July 9, 1997 the Company acquired approximately 32 acres of land located in
Arden, North Carolina and an existing 205,000 square foot building located
thereon (the "Arden Facility"). The purchase price for the Arden Facility was
$2,900,000, which was paid at closing. The acquisition of the Arden Facility was
financed with the proceeds from the issuance and sale by The Buncombe County
Industrial Facilities and Pollution Control Financing Authority of its
$5,500,000 Industrial Development Revenue Bonds (Medical Action Industries Inc.
Project), Series 1997 (the "Bonds"). Interest on the Bonds is payable on the
first business day of each January, April, July and October commencing October,
1997 and ending July, 2013. The Bonds bear interest at a variable rate,
determined weekly. The interest rate on the Bonds at December 31, 1997 was 4.3%
per annum. In connection with the issuance of the Bonds, the Company entered
into a Letter of Credit and Reimbursement Agreement dated as of July 1, 1997
with a bank for approximately $5,800,000 (the "Reimbursement Agreement") to
support principal and interest payments of the Bonds and requires payment of an
annual fee of .85%. The Company also entered into a Remarketing Agreement,
pursuant to which the Remarketing Agent will use its best efforts to arrange for
a sale in the secondary market of such Bonds. The Remarketing Agreement provides
for the payment of an annual fee of .125%.
As of December 31, 1997 the Company has used $5,268,000 of the $5,500,000
proceeds from the Bonds for the purchase and rehabilitation of the Arden
Facility and for the acquisition of machinery and equipment. The remaining
$232,000 will be used for additional rehabilitation of the Arden Facility and
for the acquisition of additional machinery and equipment, which is expected to
be completed by January 31, 1998. The remaining proceeds have been invested in
U.S. Treasury strips which yield interest at the rate of 5.2% per annum as of
December 31, 1997.
On December 11, 1997, the Company sold its manufacturing facility in Asheville,
North Carolina. The net selling price after closing costs was $1,332,000. The
proceeds were used to pay the remaining mortgage on the facility of $746,000 and
then to pay down other debt balances. The net loss on the sale of the building
was $61,000 and is included as part of the restructuring charge as discussed in
Note 4.
9
On October 30, 1997 the Company acquired certain assets of the specialty medical
packaging and collection systems for the containment and transport of
biohazardous waste business of Dayhill Corporation ("Dayhill"). The purchase
price for the acquired assets consisted of the assumption of approximately
$595,000 of Dayhill's liabilities. The acquisition has been accounted for as a
purchase and the operations of Dayhill have been included in the Company's
Statement of Operations since the acquisition date. The excess of the purchase
price and related expenses over the net assets acquired amounted to $39,723 and
is being amortized over ten (10) years.
On November 6, 1997, the Company signed an Amended and Restated Revolving Credit
Agreement (the "Agreement") with its existing bank. The Agreement expires on
September 30, 2000 and bears interst at prime rate. The Agreement provides for
total borrowings of up to $12,000,000 with a $7,000,000 sublimit for bankers
acceptances, which bear interest at 1-1/4% over the prevailing bankers
acceptance rate, and a $3,000,000 sublimit for letters of credit. Borrowings
under the Agreement are collateralized by all the assets of the Company and
advances to the Company are made in accordance with the borrowing base formula.
Note 4. RESTRUCTURING CHARGE
As a result of the Company's consolidation of its existing manufacturing
facilities and two leased warehouse facilities into the new Arden Facility,
which is expected to be completed in the fourth quarter of fiscal 1998, the
Company has recorded $273,000 of pre-tax restructuring charges in the quarter
ended September 30, 1997. The restructuring charges include lease termination
fees, net loss on the sale of the manufacturing facility in Asheville, North
Carolina, and costs incurred for moving inventory and equipment to the recently
acquired Arden Facility. It is anticipated that the consolidation will be
completed by January 31, 1998. As of December 31, 1997, the accruals pertaining
to the above mentioned charges totalled $61,000.
Note 5. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with the basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
10
The following table sets forth the computation of basic and diluted earnings per
share for the three and nine months ended December 31, 1996 and for the three
and nine months ended December 31, 1997.
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
Dollars in thousands except
per share data
Numerator:
- ----------
Net income for
basic and dilutive
earnings per share $433 $215 $1,211 $648
==== ==== ====== ====
Denominator:
- -----------
Denominator for basic
earnings per share -
weighted average shares 8,216,836 8,103,581 8,179,779 8,078,958
Effect of dilutive
securities:
Employee stock options 720,620 111,996 633,090 175,525
Non-vested restricted
stock 88,750 108,708 90,465 130,248
Warrants 33,839 0 28,197 0
--------- --------- --------- ---------
Dilutive potential
common shares 843,209 220,704 751,752 305,773
Earnings per share-
adjusted weighted
average shares 9,060,045 8,324,285 8,930,531 8,384,731
========= ========= ========= =========
Basic earnings
per share $.05 $.03 $.15 $.08
==== ==== ==== ====
Diluted earnings
per share $.05 $.03 $.15 $.08
==== ===== ==== ====
11
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
form those referred to in the forward-looking statements include, but are not
limited to, the effect of economic and market conditions, the impact of the
consolidation throughout the healthcare supply chain, the impact of healthcare
reform, opportunities for acquisitions and the Company's ability to effectively
integrate acquired companies, the ability of the Company to maintain its gross
profit margins, the ability to obtain additional financing to expand the
Company's business, the failure of the Company to successfully compete with the
Company's competitors that have greater financial resources, the loss of key
management personnel or the inability of the Company to attract and retain
qualified personnel, the availability and possible increases in raw material
prices for operating room towels, the impact of current or pending legislation
and regulation, as well as the risks described from time to time in the
Company's filings with the Securities and Exchange Commission, which include
this report on Form 10-Q and the Company's annual report on Form 10-K for the
year ended March 31, 1997.
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-lookin 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
RESULTS OF OPERATIONS
Nine months ended December 31, 1997 compared to nine months ended December 31,
- ------------------------------------------------------------------------------
1996.
- -----
Net sales for the nine months ended December 31, 1997 increased 21% to
$40,777,000 from $33,580,000 for the nine months ended December 31, 1996. The
increase in net sales was primarily attributable to an increase of $4,545,000,
or 49%, in net sales of operating room towels, $745,000, or 26%, in net sales of
the QuanTech product line and a $852,000, or 6%, increase in net sales of
laparotomy sponges. Management believes that the increase in net sales of
operating room towels, the QuanTech product line and laparotomy sponges was
primarily due to greater domestic market penetration.
The Company presently obtains substantially all of its raw materials for
operating room towels from China. These operating room towels are designated as
a textile, for which an export visa is required. These export visas could
adversely impact the availability and pricing of operating room towels. In the
event that these quota restrictions reduce the availability of operating room
towels, the Company will accelerate its procurement of operating room towels
from China and, to a lesser extent, secure operating room towels from sources
outside of China. Management presently anticipates that it will be able to meet
the Company's requirements of operating room towels through fiscal 1999, however
higher pricing for such raw materials which the Company will begin incurring in
the fourth quarter of fiscal 1998, due to the availability of export visas,
could adversely effect the Company.
Gross profit for the nine months ended December 31, 1997 increased 31% to
$9,213,000 from $7,027,000 for the nine months ended December 31, 1996. Gross
profit as a percentage of net sales for the nine months ended December 31, 1997
increased to 23% of net sales from 21% of net sales for the nine months ended
December 31, 1996. The increase in gross profit dollars and gross profit
percentage was primarily attributable to the increase in net sales, increased
manufacturing efficiencies and a decrease in the cost of certain raw materials.
Selling, general and administrative expenses for the nine months ended December
31, 1997 increased 18% to $6,419,000 from $5,453,000 for the nine months ended
December 31, 1996. As a percentage of net sales, selling, general and
administrative expenses decreased to 15.7% for the nine months ended December
31, 1997 from 16.2% for the nine months ended December 31, 1996. The increase in
selling, general and administrative expense dollars was primarily attributable
to increased commissions and distributor fees associated with increased sales
volume. The decrease in selling, general and administrative expense dollars as a
percentage of sales was primarily attributable to increased operating
efficiencies.
13
Restructuring charges of $273,000 were incurred for the nine months ended
December 31, 1997 as a result of the Company's consolidation of its existing
manufacturing facilities and two leased warehouse facilities into the new Arden
facility. It is anticipated that the consolidation will be completed by January
31, 1998.
Interest expense for the nine months ended December 31, 1997 increased 1% to
$466,000 from $463,000 for the nine months ended December 31, 1996.
Net income for the nine months ended December 31, 1997 increased to $1,211,000
from $648,000 for the nine months ended December 31, 1996. The increase in net
income is attributable to the aforementioned increase in net sales and gross
profits, which were partially offset by an increase in selling, general and
administrative expenses, restructuring charges and interest expense.
Three months ended December 31, 1997 compared to three months ended December 31,
- --------------------------------------------------------------------------------
1996.
- -----
Net sales for the three months ended December 31, 1997 increased 25% to
$14,024,000 from $11,212,000 for the three months ended December 31, 1996. The
increase in net sales was primarily attributable to an increase of $1,592,000,
or 53%, in net sales of operating room towels, $321,000, or 62%, increase in net
sales of gauze sponges and $268,000, or 18%, increase in net sales of the SBW
product line as a result of the recent acquisition of Dayhill Corporation.
Management believes that the increase in net sales of operating room towels,
laparotomy sponges and gauze sponges was primarily due to greater domestic
market penetration.
Gross profit for the three months ended December 31, 1997 increased 35% to
$3,171,000 from $2,346,000 for the three months ended December 31, 1996. Gross
profit as a percentage of net sales for the period ended December 31, 1997
increased to 23% of net sales from 21% of net sales for the three months ended
December 31, 1996. The increase in gross profit dollars and gross profit
percentage was primarily attributable to the increase in net sales, increased
manufacturing efficiencies and a decrease in the cost of certain raw materials.
Selling, general and administrative expenses for the three months ended December
31, 1997 increased 27% to $2,294,000 from $1,806,000 for the three months ended
December 31, 1996. As a percentage of net sales, selling, general and
administrative expenses increased to 16.4% for the three months ended December
31, 1997 from 16.1% for the three months ended December 31, 1996. The increase
in selling, general and administrative expense dollars and as a percentage of
sales was primarily attributable to increased commissions and distributor fees
associated with increased sales volume.
14
Interest expense for the three months ended December 31, 1997 decreased 18% to
$143,000 from $175,000 for the three months ended December 31, 1996.
Net income for the three months ended December 31, 1997 increased to $433,000
from $215,000 for the three months ended December 31, 1996. The increase in net
income is attributable to the aforementioned increase in net sales and gross
profits and a decrease in interst expense, which were partially offset by an
increase in selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had working capital of $10,228,000 with a current ratio of 2.2 at
December 31, 1997 as compared to working capital of $10,228,000 with a current
ratio of 2.34 on March 31, 1997. Total bank borrowings outstanding, including
Industrial Revenue Bonds of $5,500,000, were $11,268,000 with a debt to equity
ratio of .76 at December 31, 1997 as compared to $8,316,000 with a debt to
equity ratio of .62 at March 31, 1997. The increase in total borrowings
outstanding at December 31, 1997 was primarily attributable to the acquisition
of the Arden facility, which was financed with the proceeds from Industrial
Development Revenue Bonds issued by The Buncombe County Industrial Facilities
and Pollution Control Financing Authority.
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.
15
MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings against the Company or
in which any of its property is subject.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated October 28, 1997 re:
Item 5 - Other Events and Item 7 - Financial
Statements, Pro Forma Financial Information and
Exhibits.
(ii) Current Report on Form 8-K dated November 6, 1997 re:
Item 2 - Acquisition or Disposition of Assets and
Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits.
16
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.
Date: February 10, 1998 By: s/Richard G. Satin
----------------- ------------------
Richard G. Satin, Vice President
(Principal Accounting Officer)