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, 2001
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. 9,152,922 shares of
common stock as of August 7, 2001.
FORM 10-Q
CONTENTS
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at June 30, 2001 (Unaudited) and March 31, 2001 3-4
Statements of Earnings for the Three Months ended June 30, 2001 and
2000 (Unaudited) 5
Statements of Cash Flows for the Three Months ended June 30, 2001 and
2000 (Unaudited) 6
Notes to Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 11-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II -OTHER INFORMATION 15
2
MEDICAL ACTION INDUSTRIES INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
June 30, March 31,
2001 2001
--------- ---------
(Unaudited)
CURRENT ASSETS:
Cash $ 576 $ 639
--------- ---------
Accounts receivable, less allowance for
doubtful accounts of $204 at
June 30, 2001 and $193 at March 31, 2001 9,280 8,606
Inventories 10,892 12,547
Prepaid expenses 409 284
Deferred income taxes 211 211
Other current assets 80 56
--------- ---------
TOTAL CURRENT ASSETS: 21,448 22,343
Property, plant and equipment, net 9,468 9,617
Due from officers 382 383
Goodwill 6,773 6,773
Trademarks 402 402
Other assets 257 286
--------- ---------
TOTAL ASSETS: $ 38,730 $ 39,804
========= =========
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
June 30, March 31,
2001 2001
--------- ---------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 2,001 $ 2,109
Accrued expenses, payroll and payroll taxes 1,639 1,788
Accrued income taxes 691 316
Current portion of capital lease obligations 52 83
Current portion of long-term debt 1,360 1,360
--------- ---------
TOTAL CURRENT LIABILITIES: 5,743 5,656
Deferred income taxes 600 600
Capital lease obligations, less current portion 2 2
Long-term debt, less current portion 6,130 7,625
--------- ---------
TOTAL LIABILITIES: 12,475 13,883
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized
$.001 par value; issued and outstanding
9,072,150 shares at June 30, 2001 and
9,155,115 shares at March 31, 2001 9 9
Additional paid-in capital, net 8,428 9,436
Retained earnings 17,818 16,476
--------- ---------
TOTAL SHAREHOLDERS' EQUITY: 26,255 25,921
--------- ---------
COMMITMENTS
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY: $ 38,730 $ 39,804
========= =========
The accompanying notes are an integral part of these financial statements.
4
MEDICAL ACTION INDUSTRIES INC.
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended
June 30,
2001 2000
---------- -----------
(Unaudited) (Unaudited)
Net Sales $ 20,089 $ 18,808
Cost of Sales 14,072 13,619
---------- -----------
Gross Profit 6,017 5,189
Selling, general and administrative expenses 3,755 3,388
Interest expense 84 157
Interest (income) (18) -
---------- -----------
Income before income taxes 2,196 1,644
Income tax expense 854 641
---------- -----------
Net income $ 1,342 $ 1,003
========== ===========
Net income per share basic $ .15 $ .11
========== ===========
Net income per share diluted $ .14 $ .11
========== ===========
The accompanying notes are an integral part of these financial statements.
5
MEDICAL ACTION INDUSTRIES INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Ended June 30,
2001 2000
---------- ---------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net Income $ 1,342 $ 1,003
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 254 343
Provision for doubtful accounts 11 9
Deferred compensation 22 -
Changes in operating assets and liabilities:
Accounts receivable (685) (832)
Inventories 1,655 1,015
Prepaid expenses, and other current assets (149) (142)
Other assets 8 45
Accounts payable (108) (1,037)
Income taxes payable 575 604
Accrued expenses, payroll and payroll taxes (149) 223
---------- ---------
Net cash provided by operating activities 2,776 1,231
---------- ---------
INVESTING ACTIVITIES
Principal payment received for loans to officers 1 -
Purchase of property and equipment (84) (42)
---------- ---------
Net cash used in investing activities (83) (42)
---------- ---------
FINANCING ACTIVITIES
Proceeds from revolving line of
credit and long-term borrowings 360 1,205
Principal payments on revolving line of credit,
long-term debt and capital lease obligations (1,886) (2,768)
Repurchases of Company common stock (1,333) -
Proceeds from exercise of employee stock options 103 37
---------- ---------
Net cash used in financing activities (2,756) (1,526)
---------- ---------
Decrease in cash (63) (337)
Cash at beginning of year 639 602
---------- ---------
Cash at end of period $ 576 $ 265
========== =========
The accompanying notes are an integral part of these financial statements.
6
MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP") for interim financial information and with the instructions to Form
10-Q for quarterly reports under section 13 or 15(d) of the Securities Exchange
Act of 1934. Accordingly, they do not include all of the information and
footnotes required by US GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three (3) month period ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ended March 31,
2002. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report for the year ended March 31,
2001.
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,
2001 2001
-------- --------
(Unaudited)
(in thousands of dollars)
Finished Goods $ 5,995 $ 5,671
Work in Process 105 -
Raw Materials 4,792 6,876
-------- --------
Total $ 10,892 $ 12,547
======== ========
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 5,816 shares for the three months
ended June 30, 2000, 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, 2001 and for the three months ended
June 30, 2000.
7
Three Months Ended
June 30,
--------
2001 2000
(Unaudited) (Unaudited)
Dollars in thousands except
per share data
Numerator:
Net income for basic and dilutive earnings
per share $ 1,342 $ 1,003
========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares 9,106,051 9,209,478
---------- ----------
Effect of dilutive securities:
Employee and director stock options 711,071 331,788
Warrants 59,973 11,051
---------- ----------
Dilutive potential common shares 771,044 342,839
---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares 9,877,095 9,552,317
========== ==========
Basic earnings per share $ .15 $ .11
========== ==========
Diluted earnings per share $ .14 $ .11
========== ==========
8
NOTE 4. STOCKHOLDERS' EQUITY
For the three (3) months ended June 30, 2001, 116,500 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 $1.69 per share to $3.94 per share, the net cash proceeds from these
exercises were $102,712.
On April 6, 2001, the Company made a loan to an officer, which totaled $125,675.
The loan, which involves the purchase of the Company's common stock bears
interest at 7% and is due on May 1, 2006. The loan has been deducted from
Shareholders' equity.
Pursuant to an Employment Agreement, the Board of Directors approved the
issuance of a five-year warrant to purchase 35,000 shares of the Company's
common stock to a former principal stockholder of Dayhill Corporation, at $3.94
per share, the market value on the date of grant. In June 2001, the warrant was
exercised through the cashless exercise provision in the agreement, pursuant to
which 17,321 shares of the Company's common stock were issued.
For the three months ended June 30, 2001, the Company repurchased and retired
211,300 shares of the Company's common stock at an average price of $6.31 per
share, bringing the cumulative total to 350,100 shares at an average price of
$5.39 per share.
NOTE 5. ACCOUNTING FOR BUSINESS COMBINATIONS, INTANGIBLE ASSETS AND GOODWILL
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Buisness Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". The new standards require that all business combinations initiated
after June 30, 2001 must be accounted for under the purchase method. In
addition, all intangible assets acquired that are obtained through contractual
or legal right, or are capable of being separately sold, transferred, licensed,
rented or exchanged shall be recognized as an asset apart from goodwill.
Goodwill and intangibles with indefinite lives will no longer be subject to
amortization, but will be subject to at least an annual assessment for
impairment by applying a fair value based test.
The Company has adopted as of April 1, 2001, the provisions of SFAS Nos. 141 and
142. Therefore, annual and quarterly amortization of goodwill of $452,000 and
$113,000 are no longer recognized. By September 30, 2001, the Company will
perform a transitional fair value based impairment test and if the fair value is
less than the recorded value at April 1, 2001, the Company will record an
impairment loss in the first quarter, as a cumulative effect of a change in
accounting principle.
The following table presents a reconciliation of net income and
earnings-per-share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with the provisions of SFAS No. 142.
9
Three Months Ended
June 30,
--------
2001 2000
(Unaudited) (Unaudited)
Dollars in thousands except
per share data
Reported net income $ 1,342 $ 1,003
Add back: goodwill amortization 0 107
Add back: trademarks amortization 0 6
Income tax effect 0 (44)
---------- ----------
Adjusted net income $ 1,342 $ 1,072
========== ==========
BASIC EARNINGS PER SHARE:
Reported net income $ .15 $ .11
Goodwill amortization .00 .01
Trademarks amortization .00 .00
Income tax effect .00 .00
---------- ----------
Adjusted net income $ .15 $ .12
========== ==========
DILUTED EARNINGS PER SHARE:
Reported net income $ .14 $ .11
Goodwill amortization .00 .01
Trademarks amortization .00 .00
Income tax effect .00 .00
---------- ----------
Adjusted net income $ .14 $ .11
========== ==========
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENT
This report on Form 10-Q contains forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance and financial
results of the Company. The forward-looking statements relate to (i) the
expansion of the Company's market share, (ii) the Company's growth into new
markets, (iii) the development of new products and product lines to appeal to
the needs of the Company's customers, and (iv) the retention of the Company's
earnings for use in the operation and expansion of the Company's business.
Important factors and risks that could cause actual results to differ materially
from those referred to in the forward-looking statements include, but are not
limited to, the effect of economic and market conditions, the impact of the
consolidation throughout the healthcare supply chain, the impact of healthcare
reform, opportunities for acquisitions and the Company's ability to effectively
integrate acquired companies, the ability of the Company to maintain its gross
profit margins, the ability to obtain additional financing to expand the
Company's business, the failure of the Company to successfully compete with the
Company's competitors that have greater financial resources, the loss of key
management personnel or the inability of the Company to attract and retain
qualified personnel, the availability and possible increases in raw material
prices for operating room towels, the impact of current or pending legislation
and regulation, as well as the risks described from time to time in the
Company's filings with the Securities and Exchange Commission, which include
this report on Form 10-Q and the Company's annual report on Form 10-K for the
year ended March 31, 2001.
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.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net sales for the three months ended June 30, 2001 increased 7% to $20,089,000
from $18,808,000 for the three months ended June 30, 2000. The increase in net
sales was primarily attributed to a $406,000 or 69% increase in net sales of the
collection systems/biohazardous bags, a $431,000 or 9% increase in nets sales of
laparotomy sponges, and a $326,000 or 6% increase in net sales of operating room
towels. Management believes that the increase in net sales of the collection
systems/biohazardous bags, laparotomy sponges and operating room towel product
lines was primarily due to greater domestic market penetration.
Gross profit for the three months ended June 30, 2001 increased 16% to
$6,017,000 from $5,189,000 for the three months ended June 30, 2000. Gross
profit as a percentage of net sales for the three months ended June 30, 2001
increased to 30% of net sales from 28% of net sales for the three months ended
June 30, 2000. The increase in gross profit dollars and gross profit percentage
was primarily attributable to the increase in net sales and increased
manufacturing efficiencies at the Company's manufacturing facility in North
Carolina.
Selling, general and administrative expenses for the three months ended June 30,
2001 increased 11% to $3,755,000 from $3,388,000 for the three months ended June
30, 2000. As a percentage of net sales, selling, general and administrative
expenses increased to 19% for the three months ended June 30, 2001 from 18% for
the three months ended June 30, 2000. The increase in selling, general and
administrative expense dollars and as a percentage of net sales was primarily
attributable to increased selling expenses associated with achieving higher
sales. The increased selling expenses more than offset the $113,000 of goodwill
amortization no longer recognized, as the Company, effective April 1, 2001, has
adopted the provisions of SFAS No.'s 141 and 142. The increase in selling
expenses consisted primarily of increased commissions and salaries.
Interest expense for the three months ended June 30, 2001 decreased 46% to
$84,000 from $157,000 for the three months ended June 30, 2000. The decrease in
interest expense was attributable to a decrease in the average principal loan
balances and interest rates during the quarter ended June 30, 2001, as compared
to the quarter ended June 30, 2000. The decrease in principal loan balances
outstanding was primarily attributable to net cash provided from operating
activities from July 1, 2000 through June 30, 2001.
Net income for the three months ended June 30, 2001 increased to $1,342,000 from
$1,003,000 for the three months ended June 30, 2000. The increase in net income
is 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.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $15,705,000 with a current ratio of 3.7 at
June 30, 2001 as compared to working capital of $16,687,000 with a current ratio
of 4.0 at March 31, 2001. Total borrowings outstanding, including Industrial
Revenue Bonds of $4,510,000, were $7,490,000 with a debt to equity ratio of .29
at June 30, 2001 as compared to $8,985,000 with a debt to equity ratio of .35 at
March 31, 2001. The decrease in total borrowings outstanding at June 30, 2001
was primarily attributable 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, 2001
the Company had a cash balance of $576,000 compared to $639,000 at March 31,
2001.
The Company's operating activities provided cash of $2,776,000 for the three (3)
months ended June 30, 2001 as compared to $1,231,000 for the three (3) months
ended June 30, 2000. Net cash provided for the three (3) months ended June 30,
2001 consisted primarily of net income from operations, decreases in
inventories, depreciation and amortization and increases in income taxes
payable. These sources of cash more than offset the increase in accounts
receivable associated with increased sales, increases in prepaid expenses and
other current assets and decreases in accounts payable and accrued expenses.
Investing activities used net cash of $83,000 and $42,000 for the three (3)
months ended June 30, 2001 and June 30, 2000, respectively. The principal uses
for the three (3) months ended June 30, 2001 were purchases of property and
equipment.
Financing activities used cash of $2,756,000 for the three (3) months ended June
30, 2001 compared to $1,526,000 for the three (3) months ended June 30, 2000.
The cash used in financing activities along with the decrease in the cash
balance was used for net principal payments on its existing credit facilities
and capital lease obligations of $1,526,000 and the repurchase of the Company's
common stock of $1,333,000.
At June 30, 2001, the Company had no material commitments for capital
expenditures.
The Company believes that the anticipated future cash flow from operations,
coupled with its cash on hand and available funds under its revolving credit
agreements, will be sufficient to meet working capital requirements.
13
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, 2001, $2,980,000 was outstanding under the credit
facility. Changes in the prime rate, LIBOR rates or bankers' acceptance rates
during fiscal 2002 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 $30,000 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, 2001, $4,510,000 was outstanding for
these Bonds. The Bonds bear interest at a variable rate determined weekly.
During the quarter ended June 30, 2001, the interest rate on the Bonds
approximated 3.5%. Each 1% fluctuation in interest rates will increase or
decrease interest expense on the Bonds by approximately $45,000 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.
14
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
None
15
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 9, 2001 By: /s/ Richard G. Satin
--------------------
Richard G. Satin, Vice President
(Principal Accounting Officer)
16