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, 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. 9,643,892 shares of
common stock as of February 3, 2003.
FORM 10-Q
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CONTENTS
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PAGE
NO.
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PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements
Balance Sheets at December 31, 2002 (Unaudited) and March 31, 2002 3-4
Statements of Earnings for the Three Months ended December 31, 2002 and 2001 5
Statements of Earnings for the Nine Months ended December 31, 2002 and 2001 6
Statements of Cash Flows for the Nine Months ended December 31, 2002 and 2001 7
Notes to Financial Statements (Unaudited) 8-13
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 14-18
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 18
ITEM 4. Procedures and Controls 19
PART II - OTHER INFORMATION
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2
ITEM 1.
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MEDICAL ACTION INDUSTRIES INC.
------------------------------
BALANCE SHEETS
--------------
(DOLLARS IN THOUSANDS)
ASSETS
------
DECEMBER 31, MARCH 31,
2002 2002
--------- --------
(UNAUDITED)
CURRENT ASSETS:
Cash $ 1,089 $ 785
Accounts receivable, less allowance for doubtful accounts of $265 at
December 31, 2002 and $234 at March 31, 2002 12,392 7,847
Inventories 15,712 12,666
Prepaid expenses 612 333
Deferred income taxes 217 217
Other current assets 103 81
------- -------
TOTAL CURRENT ASSETS: 30,125 21,929
Property, plant and equipment, net 15,110 9,691
Due from officers 382 382
Goodwill 35,983 16,553
Trademarks 666 569
Other intangible assets 2,567 351
Other assets 761 172
------- -------
TOTAL ASSETS: $85,594 $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
------------------------------------
DECEMBER 31, MARCH 31,
2002 2002
--------- -------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $ 5,901 $ 2,434
Accrued expenses, payroll and payroll taxes 2,102 1,913
Accrued income taxes 670 20
Current portion of long-term debt 5,360 2,160
------- -----
TOTAL CURRENT LIABILITIES: 14,033 6,527
Deferred income taxes 982 982
Long-term debt, less current portion 30,343 8,380
------- -----
TOTAL LIABILITIES: 45,358 15,889
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized, $.001 par value; issued and
outstanding 9,641,392 shares at December 31, 2002 and 9,496,949 shares at
March 31, 2002 10 9
Additional paid-in capital, net 11,689 11,002
Retained earnings 28,537 22,747
------- -----
TOTAL SHAREHOLDERS' EQUITY: 40,236 33,758
------- -----
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY: $85,594 $49,647
======= =======
The accompanying notes are an integral part of these financial statements.
4
ITEM 1.
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MEDICAL ACTION INDUSTRIES INC.
------------------------------
STATEMENTS OF EARNINGS
----------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
2002 2001
---- ----
Net sales $28,989 $20,429
Cost of sales 20,282 14,232
------- -------
Gross profit 8,707 6,197
Selling, general and administrative expenses 4,910 3,531
Interest expense 291 59
Interest (income) (17) (18)
------- -------
Income before income taxes 3,523 2,625
Income tax expense 1,346 1,024
------- -------
Net income $2,177 $1,601
====== ======
Net income per common share basic $ .23 $ .17
====== ======
Net income per common share diluted $ .21 $ .16
====== ======
The accompanying notes are an integral part of these financial statements.
5
ITEM 1.
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MEDICAL ACTION INDUSTRIES INC.
------------------------------
STATEMENTS OF EARNINGS
----------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
2002 2001
------ -----
Net sales $75,119 $61,373
Cost of sales 52,159 42,609
------- -------
Gross profit 22,960 18,764
Selling, general and administrative expenses 13,203 11,210
Interest expense 461 198
Interest (income) (53) (57)
------- -------
Income before income taxes 9,349 7,413
Income tax expense 3,559 2,880
------- -------
Net income $ 5,790 $ 4,533
======= ========
Net income per common share basic $ .61 .49
======= ========
Net income per common share diluted $ .57 $ .45
======= ========
The accompanying notes are an integral part of these financial statements.
6
ITEM 1.
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MEDICAL ACTION INDUSTRIES INC.
------------------------------
STATEMENTS OF CASH FLOWS
------------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 5,790 $ 4,533
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 1,122 761
Provision for doubtful accounts 31 31
Deferred compensation - 24
Gain on sale of property and equipment (1) -
Changes in operating assets and liabilities net of acquisition:
Accounts receivable (4,576) (431)
Inventories (1,437) (102)
Prepaid expenses and other current assets (301) (150)
Other assets (721) 12
Accounts payble 3,467 (395)
Income taxespayable 1,135 1,143
Accrued expenses, payroll and payroll taxes 189 (194)
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,698 5,232
------------- --------------
INVESTING ACTIVITIES
Purchase price and related acquisition costs (29,122) (11,269)
Principal payment received for loans to officers - 1
Purchase of property, plant and equipment (644) (465)
Proceeds from sale of property and equipment 6 -
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (29,760) (11,733)
------------- --------------
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long term borrowings 45,150 12,635
Principal payments on revolving line of credit and long term debt (19,987) (4,840)
Repurchases of company common stock (334) (1,333)
Proceeds from exercise of employee stock options 537 573
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,366 7,035
------------- --------------
Increase in cash 304 534
Cash at beginning of year 785 639
------------- --------------
Cash at end of period $ 1,089 $ 1,173
============= ===============
The accompanying notes are an integral part of these financial statements
7
ITEM 1.
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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 nine (9) month period ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
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:
DECEMBER 31, MARCH 31,
2002 2002
--------- -------
(unaudited)
(in thousands of dollars)
Finished Goods $8,431 $6,049
Work in Process 144 -
Raw Materials 7,137 6,617
------- ------
Total $ 15,712 $ 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 377,500 shares and 316,000 shares for
the three and nine months ended December 31, 2002 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 nine
months ended December 31, 2002 and for the three and nine months ended December
31, 2001.
8
ITEM 1.
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MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
---------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(UNAUDITED)
NOTE 3. (continued)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands except
per share data)
NUMERATOR:
Net income for basic and
dilutive earnings per share $2,177 $1,601 $ 5,790 $4,533
------ ------ ------- ------
DENOMINATOR:
Denominator for basic earnings
per share - weighted average shares 9,637,842 9,310,403 9,552,652 9,184,483
--------- --------- --------- ---------
Effect of dilutive securities
Employee and director stock options 536,869 934,959 623,517 885,732
Warrants 9,937 29,071 10,339 44,995
--------- --------- --------- ---------
Dilutive potential common shares 546,806 964,030 633,856 930,727
------- ------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted average
shares 10,184,648 10,274,433 10,186,508 10,115,210
========== ========== ========== ==========
Basic earnings per share $.23 $.17 $.61 $.49
==== ==== ==== ====
Diluted earnings per share $.21 $.16 $.57 $.45
==== ==== ==== ====
NOTE 4. STOCKHOLDERS' EQUITY
For the three and nine months ended December 31, 2002, 17,750 and 171,000 stock
options, respectively, were exercised by employees of the Company in accordance
with the Company's 1989 Non-Qualified Stock Option Plan and the 1994 Stock
Incentive 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 $50,000 for the three months ended December 31, 2002 and $537,000
for the nine months ended December 31, 2002.
For the three and nine months ended December 31, 2001, 71,250 and 319,000 stock
options, respectively, were exercised by employees of the Company in accordance
with the Company's 1989 Non-Qualified Stock Option Plan and 1994 Stock Incentive
Plan, respectively. 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 $184,000 for the three months ended December 31, 2001 and $573,000 for the
nine months ended December 31, 2001.
9
ITEM 1.
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NOTE 5. ACQUISITIONS
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 including related closing costs was
approximately $19,587,000, of which $19,500,000 was paid to the seller 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,
customer relationships, and intellectual property used in the operations of the
Biosafety Division.
The acquisition of the Biosafety Division of Maxxim Medical, Inc. has
been accounted for as a purchase pursuant to Statement No. 141 as issued by the
Financial Accounting Standards Board. The operations of the BioSafety Division
of Maxxim Medical, Inc. have been included in the Company's statement of
earnings since the acquisition date. The following table summarizes the assets
acquired from the BioSafety Division of Maxxim Medical, Inc. and the preliminary
allocation of the purchase price:
Inventory $ 909,000
Land and building 1,380,000
Factory and office equipment 4,280,000
Goodwill 10,648,000
Trademarks 70,000
Non-competition agreement 700,000
Customer relationships 1,600,000
-----------
$19,587,000
===========
The BioSafety Division of Maxxim Medical, Inc. manufactures biosafety
containment products that are used to dispose of sharp medical instruments and
biological waste. Essentially, the acquisition increased the Company's market
share in these products, while gaining manufacturing efficiencies and the
benefit of increased purchasing power and lower material costs. As a result of
the acquisition, the company has projected approximately $19 million of
incremental sales to existing customers of biosafety containment products with
limited 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 trademarks will be tested for impairment periodically, in
accordance with Statement No. 142 as issued by the Financial Accounting
Standards Board. The non-competition agreement will be amortized over a period
of five years and the customer relationships will be amortized over a period of
twenty years.
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
10
ITEM 1.
- -------
certain adjustments, none of which are anticipated to be material, because the
valuation of the assets and acquisition costs have not been finalized.
Summarized below are the unaudited pro forma results of operations of the
Company as if the BioSafety Division of Maxxim Medical, Inc. has been acquired
at the beginning of the fiscal periods presented:
Three Months ended December 31, Nine Months ended December 31,
2001 2002 2001
---- ---- ----
Net Sales $28,429,000 $87,658,000 $84,246,000
Net Income 2,191,000 6,149,000 6,531,000
Net income per common share
Basic $0.24 $0.64 $0.71
Diluted $0.21 $0.60 $0.65
The pro forma results of operations of the Company for the three months ended
December 31, 2002 were not materially different than actual results.
Reclassifications and adjustments were made to the pro forma results to properly
reflect depreciation of property, plant and equipment, interest expense,
financing fees and tax rates.
The pro forma financial information presented above for the three and nine
months ended December 31, 2002 and 2001 is not necessarily indicative of either
the results of operations that would have occurred had the acquisition taken
place at the beginning of the periods presented or of future operating results
of the combined companies.
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
$9,535,000 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 $ 700,000
Factory and office equipment 26,000
Goodwill 8,782,000
Trademarks 27,000
---------
$9,535,000
==========
11
ITEM 1.
- -------
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.
NOTE 6. LONG-TERM DEBT
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 October 21, 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 alternate
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 75 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 are
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.
12
ITEM 1.
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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.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002 and the interim disclosure provisions are effective for interim periods
beginning after December 15, 2002. The Company currently plans to continue to
apply the intrinsic-value based method to account for stock options and will
comply with the new disclosure requirements beginning with its fiscal year
ending March 31, 2003.
13
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
- ---------------------
NINE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2001
- --------------------------------------------------------------------------------
Net sales for the nine months ended December 31, 2002 increased $13,746,000 or
22% to $75,119,000 from $61,373,000 for the nine months ended December 31, 2001.
The increase in net sales was primarily attributable to a $9,517,000, or 283%
increase in net sales of the collection systems/biohazardous bags, a $8,311,000
or 120% increase in net sales of small kits and trays, a $1,482,000 increase in
net sales of patient aids and a $1,229,000 increase in net sales of non- woven
products. These increases were partially offset by a $2,396,000 or 16% decrease
14
ITEM 2.
- -------
in net sales of laparotomy sponges and a $3,469,000 or 18% decrease in net sales
of operating room towels.
Management believes that the increase in net sales of the collection
systems/biohazardous bags product line was primarily due to net sales of
approximately $4,134,000 of collection systems/biohazardous bags products
acquired from MD Industries on June 21, 2002, net sales of $4,947,000 of
collection systems/biohazardous bags products acquired from the BioSafety
Division of Maxxim Medical, Inc. on October 25, 2002 and greater domestic market
penetration. Net sales of small kits and trays increased primarily due to net
sales of approximately $7,019,000 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 14% and average
selling prices decreased 3%. Unit sales of operating room towels decreased 8%
and average selling prices decreased 11%. 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 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 nine months ended December 31, 2002 increased 22% to
$22,960,000 from $18,764,000 for the nine months ended December 31, 2001. Gross
profits as a percentage of net sales for the nine months ended December 31, 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 nine months ended December
31, 2002 increased 17% to $13,120,000 from $11,210,000 for the nine months ended
December 31, 2001. As a percentage of net sales, selling, general and
administrative expenses decreased to 17% for the nine months ended December 31,
2002 from 18% for the nine months ended December 31, 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, the BioSafety
division of Maxxim Medical, Inc. and Medi-Flex acquisitions.
Interest expense for the nine months ended December 31, 2002 increased 133% to
$461,000 from $198,000 for the nine months ended December 31, 2001. The increase
in interest expense was attributable to an increase in the average principal
loan balances during the nine months ended December 31, 2002, as compared to the
nine months ended December 31, 2001. The increase in principal loan balances
outstanding was primarily attributable to the MD Industries acquisition on June
21, 2002 and the BioSafety Division of Maxxim Medical, Inc. acquisition on
October 25, 2002.
15
ITEM 2.
- -------
Net income for the nine months ended December 31, 2002 increased to $5,790,000
from $4,533,000 for the nine months ended December 31, 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.
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001
- -------------------------------------------------------------------------------
Net sales for the three months ended December 31, 2002 increased $8,560,000 or
42% to $28,989,000 from $20,429,000 for the three months ended December 31,
2001. The increase in net sales was primarily attributed to a $2,501,000 or 89%
increase in net sales of small kits and trays, a $7,019,000 or 547% increase in
net sales of the collection systems/biohazardous bags product line, a $284,000
increase in net sales of non-woven products and a $462,000 increase in net sales
of patient aids. These increases were partially offset by a $254,000 or 6%
decrease in net sales of laparotomy sponges and a $986,000 or 15% 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
$1,866,000 of small kits and tray products acquired from Medi-Flex on November
30, 2001 and greater domestic market penetration. Net sales of collection
systems/biohazardous bags increased primarily due to $1,884,000 of sales of
products acquired from MD Industries on June 21, 2002, $4,947,000 of BioSafety
Division products of Maxxim Medical, Inc. acquired on October 25, 2002 and
greater domestic market penetration. Net sales of non-woven products and patient
aids was primarily due to greater domestic market penetration.
Unit sales of laparotomy sponges decreased by 3% and average selling prices
decreased by 3%. Unit sales of operating room towels decreased by 7% and average
selling prices decreased by 9%. 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 December 31, 2002 increased 41% to
$8,707,000 from $6,197,000 for the three months ended December 31, 2001. Gross
profit as a percentage of net sales was 30% for the three months ended December
31, 2002, and 2001, respectively. The increase in gross profit dollars was
primarily attributable to the increase in net sales.
Selling, general and administrative expenses for the three months ended December
31, 2002 increased 38% to $4,856,000 from $3,531,000 for the three months ended
December 31, 2001. As a percentage of net sales, selling, general and
administrative expenses remained consistent at 17% for the three months ended
December 31, 2002 and 2001, respectively. The increase in selling, general and
administrative expense dollars was primarily attributable to increased shipping
and selling expenses associated with achieving higher sales and increased
administrative expenses to support
16
ITEM 2.
- -------
the MD Industries acquisition which was completed on June 21, 2002 and
the BioSafety Division of Maxxim Medical, Inc. which was completed on October
25, 2002.
Interest expense for the three months ended December 31, 2002 increased 393% to
$291,000 from $59,000 for the three months ended December 31, 2001. The increase
in interest expense was attributable to an increase in the average principal
loan balances during the quarter ended December 31, 2002, as compared to the
quarter ended December 31, 2001. The increase in the average principal loan
balances outstanding was primarily attributable to the MD Industries acquisition
on June 21, 2002, and the BioSafety Division of Maxxim Medical, Inc. acquisition
on October 25, 2002.
Net income for the three months ended December 31, 2002 increased to $2,177,000
from $1,601,000 for the three months ended December 31, 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 $16,092,000 with a current ratio of 2.1 to 1
at December 31, 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 $3,970,000, were $35,703,000 with a debt
to equity ratio of .89 to 1 at December 31, 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 December 31, 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 and the acquisition of certain assets relating to the BioSafety
Division of Maxxim Medical, Inc. on October 25, 2002.
The Company has financed its operations primarily through cash flow from
operations and borrowings from its existing credit facilities. At December 31,
2002, the Company had a cash balance of $1,089,000 compared to $785,000 at March
31, 2002.
The Company's operating activities provided cash of $4,698,000 for the nine
months ended December 31, 2002 as compared to $5,232,000 provided for the nine
months ended December 31, 2001. Net cash provided for the nine months ended
December 31, 2002 consisted primarily of net income from operations,
depreciation, amortization, increases in income taxes payable and increases in
accounts payable. These sources of cash more than offset the increase in
accounts receivable associated with increased sales, and increases in
inventories, prepaid expenses and other current assets.
Investing activities used net cash of $29,760,000 and $11,733,000 for the nine
months ended December 31, 2002 and December 31, 2001, respectively. The
principal uses for the nine months ended December 31, 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 and the acquisition of certain assets relating to the BioSafety
Division of Maxxim Medical, Inc. on October 25, 2002. The purchase price and
related acquisition costs for the MD Industries
17
ITEM 2.
- -------
business was approximately $9,535,000. The purchase price and related
acquisition costs for the BioSafety Division of Maxxim Medical, Inc. was
approximately $19,587,000.
Financing activities provided cash of $25,366,000 for the nine months ended
December 31, 2002 compared to $7,035,000 for the nine months ended December 31,
2001. Financing activities consisted of borrowings under the Company's existing
credit facility of $45,150,000, principally to finance the acquisition of
certain assets of MD Industries and certain assets of the BioSafety Division of
Maxxim Medical, Inc., offset by principal payments of $19,987,000. Other
financing activities include cash proceeds from the exercise of stock options of
$537,000 and $334,000 used for the repurchase of the Company's common stock.
At December 31, 2002, 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.
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
"alternate base rate" plus the applicable margin or at the Company's option the
"LIBOR rate" plus the "applicable margin". The alternate 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 75 basis points. The rates for both LIBOR and
Alternate base rate loans are established quarterly based upon agreed upon
financial ratios. At December 31, 2002, $31,733,000 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 $317,000
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 December 31, 2002, $3,970,000 was outstanding for
these Bonds. The Bonds bear interest at a variable rate determined weekly.
During the quarter ended December 31, 2002, the interest rate on the Bonds
approximated 1.6%. Each 1% fluctuation in interest rates will increase or
decrease interest expense on the Bonds by approximately $40,000 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.
18
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.
19
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
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
Current Report on Form 8-K dated November 8, 2002 covering
Acquisition or Disposition of Assets and Financial Statements and
Exhibits.
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: February 3, 2003 By: /s/ Richard G. Satin
---------------- --------------------
Richard G. Satin
Principal Financial Officer
Vice President of Operations and
General Counsel
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: February 3, 2003
------------------
/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: February 3, 2003
-----------------
/s/ Richard G. Satin
- ---------------------------------
Richard G. Satin
Principal Financial Officer
Vice President-Operations and
General Counsel