SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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:
(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. 9,227,022 shares of common
stock as of August 11, 2000.
Form 10-Q
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CONTENTS
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Page No.
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Balance Sheets at June 30, 2000 (Unaudited) and March 31, 2000 3-4
Statements of Earnings for the Three Months ended June 30, 2000 and 1999 (Unaudited) 5
Statements of Cash Flows for the Three Months ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Financial Statements (Unaudited) 7-9
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION 14
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MEDICAL ACTION INDUSTRIES INC.
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Balance Sheets
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(dollars in thousands)
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ASSETS
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June 30, March 31,
2000 2000
---- ----
(Unaudited)
CURRENT ASSETS:
Cash $ 265 $ 602
Accounts receivable, less allowance for
doubtful accounts of $166 at
June 30, 2000 and $157 at March 31, 2000 8,562 7,739
Inventories 12,436 13,451
Prepaid expenses 382 239
Deferred income taxes 117 117
Other current assets 34 143
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TOTAL CURRENT ASSETS: 21,796 22,291
Property, plant and equipment, net 8,258 8,425
Due from officers 383 383
Intangibles,
less accumulated amortization of $1,224
at June 30, 2000 and $1,111 at
March 31, 2000 7,516 7,629
Other assets 360 426
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TOTAL ASSETS: $38,313 $39,154
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The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC.
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Balance Sheets
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(dollars in thousands)
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LIABILITIES AND SHAREHOLDERS' EQUITY
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June 30, March 31,
2000 2000
---- ----
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 1,842 $ 2,879
Accrued expenses, payroll and payroll taxes 1,565 1,342
Accrued income taxes 472 -
Current portion of capital lease obligations 168 174
Current portion of long-term debt 1,360 1,110
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TOTAL CURRENT LIABILITIES: 5,407 5,505
Deferred income taxes 568 568
Capital lease obligations, less current portion 58 85
Long-term debt, less current portion 9,465 11,245
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TOTAL LIABILITIES: 15,498 17,403
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized $.001 par value; issued and
outstanding 9,227,022 shares at June 30, 2000 and
9,198,022 shares at March 31, 2000 9 9
Additional paid-in capital, net 9,734 9,673
Retained earnings 13,072 12,069
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TOTAL SHAREHOLDERS' EQUITY: 22,815 21,751
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY: $38,313 $39,154
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The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC.
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Statements of Earnings
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(dollars in thousands except per share data)
Three Months Ended
June 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
Net Sales $ 18,808 $ 17,913
Cost of Sales 13,619 13,435
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Gross Profit 5,189 4,478
Selling, general and administrative expenses 3,388 3,130
Interest expense 157 234
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Income before income taxes 1,644 1,114
Income tax expense 641 434
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Net income $ 1,003 $ 680
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Basic and diluted earnings per share $ .11 $ .08
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The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC.
Statement of Cash Flows
(dollars in thousands)
Three Months Ended June 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net Income $ 1,003 $ 680
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 343 315
Provision for doubtful accounts 9 7
Deferred compensation -- 16
Changes in operating assets and liabilities:
Accounts receivable (832) (2,470)
Inventories 1,015 1,522
Prepaid expenses, and other current assets (142) (74)
Other assets 45 3
Accounts payable (1,037) 150
Income taxes payable 604 399
Accrued expenses, payroll and payroll taxes 223 267
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Net cash provided by operating activities 1,231 815
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INVESTING ACTIVITIES
Purchase price and related acquisition costs -- (8)
Purchase of property and equipment (42) (198)
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Net cash used in investing activities (42) (206)
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FINANCING ACTIVITIES
Proceeds from revolving line of
credit and long-term borrowings 1,205 1,961
Principal payments on revolving line of credit,
long-term debt, other note payable
and capital lease obligations (2,768) (3,164)
Proceeds from exercise of employee stock options 37 39
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Net cash used in financing activities (1,526) (1,164)
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Decrease in cash (337) (555)
Cash at beginning of year 602 672
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Cash at end of period $ 265 $ 117
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The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
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NOTES TO FINANCIAL STATEMENTS
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(Unaudited)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited 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 (3) month
period ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ended March 31, 2001. For further information,
refer to the financial statements and footnotes thereto included in the
Company's annual report for the year ended March 31, 2000.
Note 2. INVENTORIES
Inventories, which are stated at the lower of cost (first-in, first-out) or
market, consist of the following:
June 30, March 31,
2000 2000
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(Unaudited)
(in thousands of dollars)
Finished Goods $ 5,244 $ 5,344
Work in Process 85 -
Raw Materials 7,107 8,107
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Total $12,436 $13,451
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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 price during the year. Excluded from the calculation of earnings per
share are options and warrants to purchase 5,816 and 106,903 shares for the
three months ended June 30, 2000 and June 30, 1999, respectively, as their
inclusion would not have been dilutive. The following table sets forth the
computation of basic and diluted earnings per share for the three months ended
June 30, 2000 and for the three months ended June 30, 1999.
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Three Months Ended
June 30,
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2000 1999
(Unaudited) (Unaudited)
Dollars in thousands except
per share data
Numerator:
- ----------
Net income for basic and dilutive earnings
per share $ 1,003 $ 680
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Denominator:
- ------------
Denominator for basic earnings per share -
weighted average shares 9,209,478 8,614,558
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Effect of dilutive securities:
Employee stock options 331,788 359,365
Non-vested restricted stock - 18,944
Warrants 11,051 19,074
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Dilutive potential common shares 342,839 397,383
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Denominator for diluted earnings per share -
adjusted weighted average shares 9,552,317 9,011,941
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Basic and diluted earnings per share $ .11 $ .08
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Note 4. EXERCISE OF EMPLOYEE STOCK OPTIONS
For the three (3) months ended June 30, 2000, 29,000 stock options were
exercised by employees of the Company in accordance with the Company's 1989
Non-Qualified Stock Option Plan. The exercise price of the options exercised
ranged from $.97 per share to $2.69 per share, the cash proceeds from these
exercises was $36,701.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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FORWARD-LOOKING STATEMENT
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This report on Form 10-Q contains forward-looking statements as defined by
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 related 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 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, 2000.
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.
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RESULTS OF OPERATIONS
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Three Months ended June 30, 2000 compared to Three Months ended June 30, 1999
- -----------------------------------------------------------------------------
Net sales for the three months ended June 30, 2000 increased 5% to $18,808,000
from $17,913,000 for the three months ended June 30, 1999. The increase in net
sales was primarily attributed to a $585,000 or 11% increase in net sales of the
operating room towel product line. Management believes that the increase in net
sales of the operating room towel product line was primarily due to greater
domestic market penetration.
The Company presently obtains a portion 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 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 2001.
Gross profit for the three months ended June 30, 2000 increased 16% to
$5,189,000 from $4,478,000 for the three months ended June 30, 1999. Gross
profit as a percentage of net sales for the three months ended June 30, 2000
increased to 28% of net sales from 25% of net sales for the three months ended
June 30, 1999. The increase in gross profit dollars and gross profit percentage
was primarily attributable to the increase in net sales, increased manufacturing
efficiencies at the Company's manufacturing facility in North Carolina and a
decrease in raw material costs.
Selling, general and administrative expenses for the three months ended June 30,
2000 increased 8% to $3,388,000 from $3,130,000 for the three months ended June
30, 1999. As a percentage of net sales, selling, general and administrative
expenses increased to 18% for the three months ended June 30, 2000 from 17% for
the three months ended June 30, 1999. The increase in selling, general and
administrative expense dollars and as a percentage of sales was primarily
attributable to increased commissions and distributor fees.
Interest expense for the three months ended June 30, 2000 decreased 33% to
$157,000 from $234,000 for the three months ended June 30, 1999. The decrease in
interest expense was attributable to a decrease in the average principal loan
balances during the quarter ended June 30, 2000, as compared to the quarter
ended June 30, 1999. The decrease in principal loan balances outstanding was
primarily attributable to net cash provided from operating activities from July
1, 1999 through June 30, 2000.
Net income for the three months ended June 30, 2000 increased to $1,003,000 from
$680,000 for the three months ended June 30, 1999. The increase in net income is
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attributable to the aforementioned increase in net sales and gross profit and
decrease in interest expense, which were partially offset by an increase in
selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
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The Company had working capital of $16,389,000 with a current ratio of 4.0 at
June 30, 2000 as compared to working capital of $16,786,000 with a current ratio
of 4.0 at March 31, 2000. Total borrowings outstanding, including Industrial
Revenue Bonds of $4,870,000, were $10,825,000 with a debt to equity ratio of .47
at June 30, 2000 as compared to $12,355,000 with a debt to equity ratio of .57
at March 31, 2000. The decrease in total borrowings outstanding at June 30, 2000
was primarily attributable to the reduction of the cash balance and net cash
provided by operating activities.
The Company has financed its operations primarily through cash flow from
operations and borrowings from its existing credit facilities. At June 30, 2000,
the Company had a cash balance of $265,000 compared to $602,000 at March 31,
2000.
The Company's operating activities provided cash of $1,231,000 for the three (3)
months ended June 30, 2000 as compared to $815,000 provided for the three (3)
months ended June 30, 1999. Net cash provided for the three (3) months ended
June 30, 2000 consisted primarily of net income from operations, decreases in
inventories, depreciation and amortization and increases in accrued expenses and
income taxes payable. These sources of cash more than offset the increase in
accounts receivable associated with increased sales.
Investing activities used net cash of $42,000 and $206,000 for the three (3)
months ended June 30, 2000 and June 30, 1999, respectively. The principal uses
for the three months (3) ended June 30, 2000 were purchases of property and
equipment.
Financing activities used cash of $1,526,000 for the three (3) months ended June
30, 2000 compared to $1,164,000 used for the three (3) months ended June 30,
1999. The cash used in financing activities along with the decrease in the cash
balance was used to pay down the Company's debt in connection with its credit
facilities.
At June 30, 2000, the Company had the following material commitments for capital
expenditures. On February 28, 2000, the Company entered into a contract to
purchase approximately 1.4 acres of land located in Hauppauge, New York and an
existing 12,000 square foot building located thereon (the "Hauppauge Facility").
The purchase price for the Hauppauge Facility is $1,054,400, which upon the
signing of the contract, the Company paid $50,000 as a down payment. The balance
was paid at Closing, which occurred on July 6, 2000. The Company has also
entered into an agreement for building improvements and office construction on
the Hauppauge Facility for approximately $261,000. A deposit of $81,550 was made
for this agreement in February 2000. The
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Hauppauge Facility will replace the current leased facility in Hauppauge, New
York as the Company's corporate headquarters. The deposit and subsequent
purchase made for the Hauppauge Facility was financed from funds from its
existing credit facility.
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.
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 June 30, 2000, $5,955,000 was outstanding under the credit
facility. Changes in the prime rate, libor rates or bankers acceptance rates
during fiscal 2000 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 $60,000 on an
annualized basis.
In addition, the Company is exposed to interest rate change market risk with
respect to the proceeds received from the issuance and sale by the Buncombe
County Industrial and Pollution Control Financing Authority Industrial
Development Revenue Bonds. At June 30, 2000, $4,870,000 was outstanding for
these Bonds. The Bonds bear interest at a variable rate determined weekly.
During the quarter ended June 30, 2000, the interest rate on the Bonds
approximated 4.7%. Each 1% fluctuation in interest rates will increase or
decrease interest expense on the Bonds by approximately $49,000 on an annualized
basis.
A significant portion of the Company's raw materials are purchased from China
and to a lesser extent from India. All such purchases are transacted in U.S.
dollars. The Company's financial results, therefore, could be impacted by
factors such as changes in foreign currency, exchange rates or weak economic
conditions in foreign countries in the procurement of such raw materials. To
date, sales of the Company's products outside the United States have not been
significant.
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MEDICAL ACTION INDUSTRIES INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings against the Company
or in which any of its property is subject.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. (a) Exhibits and Reports on Form 8-K
None
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated June 5, 2000 relating to
Item 5-Other Events and Item 7-Financial Statements, Pro
Forma Financial Information and Exhibits
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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: August 10, 2000 By: /s/ Richard G. Satin
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Richard G. Satin, Vice President
(Principal Accounting Officer)
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