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TODAY'S HEALTHCARE CHALLENGE:
SURVIVAL OF THE FITTEST
[LOGO]
MEDICAL ACTION INDUSTRIES INC.
1996 ANNUAL REPORT
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Company Profile
Headquartered in Hauppauge, New York, Medical Action Industries Inc. develops,
manufactures, markets and distributes a variety of disposable, surgical related
products, including laparotomy sponges, operating room towels, sterilization
pouches, surgical light handle covers, needle counters, gauze sponges and burn
dressings. The Company's manufacturing, packaging, sterilization and warehousing
facilities are located in Asheville, North Carolina. Medical Action's products
are marketed primarily to hospitals through an extensive network of independent
distributors, direct sales personnel and manufacturers' representatives. The
Company also manufactures its products under private label contracts to other
distributors and medical suppliers. Medical Action is the leading manufacturer
and distributor of sterile laparotomy sponges and sterile operating room towels
in the United States.
Table of Contents
Selected Financial Data ................................................... 1
Letter to Stockholders .................................................... 2
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ............................................................ 5
Consolidated Balance Sheets ............................................... 7
Consolidated Statements of Operations ..................................... 8
Consolidated Statements of Shareholders' Equity ........................... 9
Consolidated Statements of Cash Flows ..................................... 10
Notes to Consolidated Financial Statements ................................ 11
Statement of Management Responsibility .................................... 16
Report of Independent Auditors ............................................ 16
Corporate Information and Directory ........................ Inside Back Cover
The cover of this year's Annual Report reflects the state of the healthcare
industry. This environment offers unprecedented opportunities for Medical Action
Industries Inc. to enhance its competitive position and pursue future success.
To be truly effective, it is necessary to blend our expertise with the
complementary expertise of others. This is why at the heart of our strategy for
success lies our vision: to be the partner of choice for ever better healthcare.
Such partnerships will increase stockholder value by leading to the development,
acquisition and distribution of quality healthcare products.
<PAGE>
Selected Financial Data MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
- --------------------------------------- ---------------------------------------------------------------------------
Year ended March 31, 1996 1995 1994 1993 1992
- --------------------------------------- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations Data
Net sales ............................. $38,846,290 $35,111,326 $36,457,455 $33,337,546 $27,145,829
Income (loss) before income taxes
and cumulative effect of
accounting change .................. 1,204,310 (246,695) 648,723 2,018,059 479,660
Net income (loss) ..................... 710,743 (183,146) 392,103 1,314,742 344,644
Net income (loss) per common share .... .09 (.02) .05 .17 .06
Balance Sheet Data
Total assets .......................... $24,390,336 $24,328,602 $19,270,845 $21,422,559 $19,201,733
Working capital (1) ................... 10,334,499 11,034,593 9,020,889 10,104,504 9,123,099
Long-term debt including capital leases
(less current portion) .............. 4,387,958 7,328,626 3,749,965 5,763,011 6,527,871
Shareholders' Equity .................. 12,273,367 11,209,191 10,883,516 10,440,384 8,981,223
</TABLE>
(1) See Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(2) There were no cash dividends declared in any of the periods presented
above. See Note 10 to Notes to Consolidated Financial Statements.
Net Sales
(in millions of dollars)
[Bar graph representing the following net sales information]
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$27.1 $33.3 $36.5 $35.1 $38.8
Net Income
(in thousands of dollars)
[Bar graph representing the following net income information]
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$344.6 $1.314.7 $392.1 $(183.1) $710.7
Shareholders' Equity
(in millions of dollars)
[Bar graph representing the following shareholders' equity information]
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$9.0 $10.4 $10.9 $11.2 $12.3
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To Our Stockholders, Customers, Healthcare Partners and Teammates
A Year of Accomplishments
We are pleased to report that fiscal 1996 was an exciting and pivotal year for
Medical Action--one of growth, profitability and strategic decisions which we
believe will have significant impact on your Company's future. Medical Action
generated record sales, improved operating profits enough to enable earnings
growth to surpass sales growth, and completed an important acquisition to
further diversify our product offerings.
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"Man is most uniquely human when he turns obstacles into opportunities."
Eric Hoffer, American philosopher
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Medical Action today is focused intensely on a core strategy that will permit us
to fulfill our corporate objective to be the healthcare partner of choice.
Several strengths will help us achieve that objective. Our products are of the
highest quality. Our service levels and information systems give us a tremendous
competitive advantage. Medical Action is uniquely well positioned to prosper in
today's cost conscious healthcare marketplace. We are applying leadership in
terms of quality and innovation. We embrace the principle of achieving
operational excellence through the process of continuous improvement.
In all these ways, Medical Action is making use of intangible resources that are
every bit as significant as our financial strengths. These resources include our
strategic alliances throughout the supply chain. They include our brand image
and reputation, and the knowledge and productivity of our employees.
Healthcare costs are becoming an ever more crucial global issue. Providers face
source and manufacturing cost constraints. As healthcare companies work to meet
this highly demanding challenge, innovation is a central strategy. Competition
will continue to intensify, leading inevitably to consolidation. It is occurring
in virtually every market segment within the industry.
This harsh business environment brings opportunity for resourceful companies.
Medical Action will continue to build lasting, personal value-oriented
relationships with customers by maintaining product quality and by being
responsive to customer needs. We must be relentless in our efforts to reduce
overhead, direct labor, raw materials, re-work and scrap costs to produce
results in line with our corporate objectives.
We're on the right track already in cutting costs. Previously instituted
efficiency programs were a major factor in reducing selling, general and
administrative expenses as a percentage of sales in fiscal 1996 to 15.7% from
16.6% in fiscal 1995. And, as an industry leader in electronic data interchange
(EDI), we've planned and implemented EDI transactions with many of our
customers. EDI allows for paperless transactions, including order entry, reduces
costs and permits our partners to reduce inventory levels. During the past
fiscal year, we received approximately 62% of all our orders electronically via
EDI.
Strategic Diversification
Our key to the future is our focus on new products. As we said in last year's
letter to stockholders, the single most important ingredient in achieving future
growth is increased product stream. With the acquisition in August 1994 of the
disposable surgical product business of QuanTech, Inc., we demonstrated our
ability to meet this challenge. For fiscal 1996, sales from QuanTech's product
line represented approximately 8% of the Company's total revenues.
In January 1996 we completed our second acquisition in less than twenty months
by acquiring certain assets of the sterilization packaging, monitoring and
contamination control products business of Lawson Mardon Medical Products, Inc.
("Lawson Mardon"). The acquired products include sterilization pouches,
sterilization monitors, sterility maintenance covers, biohazard bags, indicators
and integrators. We also negotiated a right of first refusal to acquire the
United Kingdom operations of Lawson Mardon. Should its owner decide to sell,
we'd obtain a ready-made platform to market our products in Europe.
Our acquisitions continue to strengthen the opportunity for Medical Action to
grow quickly and efficiently by maximizing the revenue potential of these new
products through our existing channels of distribution to current Medical Action
customers and through sales to new markets, such as alternate care. We
anticipate that for fiscal 1997, revenue from products developed and
2
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acquired during the past three years will represent approximately 20% of the
Company's total sales.
Acquisitions will continue to play an important role in our corporate strategy.
We will evaluate candidates on their ability to add breadth to our product
lines, provide vehicles into new markets and increase the depth of our
manufacturing capabilities. This ingredient of Medical Action's past success
will be an ingredient of our future success.
Financial Performance
We are pleased to report that Medical Action produced solid financial results
for the fiscal year ended March 31, 1996.
We achieved record revenues of $38,846,000, an 11% increase from $35,111,000 for
fiscal 1995. We are especially pleased that for the three months ended March 31,
1996 we achieved record revenues of $10,266,000, the very first time we exceeded
the $10 million mark for quarterly revenues. The record sales level for fiscal
1996 was primarily attributable to the Company's QuanTech product line, whose
sales increased approximately $1,420,000 compared to fiscal 1995, growth in
domestic sales of laparotomy sponges, which increased approximately $3,014,000
compared to fiscal 1995, as well as to $1,157,000 in sales of Lawson Mardon
products.
Net income for the year ended March 31, 1996 increased to $711,000, or $.09 per
share, versus a net loss of $183,000, or $.02 per share, in fiscal 1995. Our
balance sheet continues to reflect our strong performance. At year end, we had a
current ratio of 2.4 and working capital of approximately $10,334,000. In
addition, shareholders' equity increased to a record $12,273,000 and has, since
fiscal 1991 increased more than 140%.
We further solidified our banking relations during 1996 by negotiating an
amended loan agreement with our lending institution. This amended agreement,
which expires on September 30, 1998, bears interest at prime plus 1/4% (a
decrease of 1/4%) and provides for total borrowings of up to $10 million with a
$4 million sublimit for bankers' acceptances (an increase of $1 million) and a
$2 million sublimit for letters of credit.
Market Share Leader
Medical Action is the market share leader in the manufacture and distribution of
sterile laparotomy sponges and sterile disposable operating room towels in the
U.S. In addition, we see strong potential in our recently acquired lines of
QuanTech and Lawson Mardon products as well as other new products we've
introduced during the past several years. We will continue to step up our
product development pace in the coming years. More products are in the pipeline
now than at any time in the Company's history. We will continue to focus on
increasing our core market penetration with these new products and on entering
new markets such as alternate care, dentistry and veterinary practices with our
existing products.
Our distribution system is a fundamental strength that provides us an important
competitive advantage. It extends from our network of healthcare distributors,
which includes Baxter Healthcare Hospital Supply Division, Owens & Minor, Inc.,
and General Medical Corp., manufacturers' representative organizations and
direct sales personnel. We also supply products through our relationships with
hospital alliances such as VHA Hospital Supply, Premier Health Alliance, Inc.
and American Healthcare Systems, and investor owned hospital organizations,
including NME, AMI and Daughters of Charity.
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"You can expect Medical Action to enhance long-term value for stockholders by
investing in new products and cost control efficiencies, expanding into new
markets, and making strategic and synergistic acquisitions."
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We continue to focus and refine our sales and marketing efforts for our
non-sterile products as hospitals increasingly expand their use of custom
procedure trays. These trays contain several products in configurations designed
and produced for the unique practices of an individual hospital unit, procedure
or physician. Many of the tray suppliers, such as Baxter Healthcare Corp. and
Maxxim Medical Inc., are vertically integrating the packaging process by buying
bulk, non-sterile operating room towels, laparotomy sponges, light handle covers
and needle counters to place in these custom trays. The trays are then
sterilized, saving healthcare providers money by reducing set-up time needed for
a procedure,
3
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minimizing waste, and simplifying ordering and inventory management.
The Strength of Our People
Medical Action's growth is based on more than acquisitions. It is also based on
developing strong management and operating personnel to fulfill our customers'
needs. From our modest beginning 19 years ago in a small warehouse in Plainview,
New York to our expansions to Asheville, North Carolina and Hauppauge, New York,
we increased our market presence thanks to our ability to provide the highest
levels of product quality and customer service at competitive and profitable
prices. And that's because at each step in our development, our employees have
shown the enthusiasm and capacity to learn and grow.
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"Intense competition in the healthcare industries winnows out companies that
don't deliver sufficient value. Quality, service, innovation, its employees and
its relationships with customers combine to make Medical Action a leader in the
markets it serves."
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We continue to reinvest in our facilities and work on solutions to meet future
customer requirements. We review the effectiveness of our advanced information
systems and manufacturing protocols periodically to ensure our customers'
success. We continue to focus on our employees to ensure that we have not only
the capital assets but the dedication, knowledge and enthusiasm to use these
assets to exceed our customers' requirements and expectations.
Future Outlook
Although the healthcare industry is changing, our goals remain clear. Medical
Action will continue to be a leader focused on providing quality products to our
customers. Medical Action is well positioned for the future. We will continue to
refine our organization to meet the ever-changing needs of the industry and our
customers. The high adaptability and dedication of our employees will be
fundamental to continued success. Our reputation for quality is excellent and we
are a low cost provider in an industry driven by economies of scale. Our service
capabilities are extensive and flexible. Also, Medical Action's strong balance
sheet and operating cash flow can readily sustain our growth momentum. And our
management team has considerable depth and experience, as well as an
entrepreneurial spirit fueled by its over 30% ownership of the Company.
As a Company, and as a team, we are keenly aware of challenges and opportunities
that lie ahead. We have demonstrated that we can change courses rapidly as the
target before us shifts and can strike with lightning speed to accomplish our
mission. Because we have spent a great deal of time anticipating changes, we
have strategically positioned our Company to be on the offensive, not the
defensive. We are proactively committing resources to prepare for what is
coming, instead of having to make changes down the road under less favorable
conditions. We are striving to maintain a workplace environment in which both
customer satisfaction and the welfare of our teammates are paramount.
The dedication, loyalty and commitment of our teammates continue to be the
source of our strength. Providing superior products and services to our
customers in a cost effective manner will enable us to build on our past
successes and to meet the challenges that face us. We will plan carefully, take
advantage of new opportunities as they arise, and continue our commitment to
provide superior returns to our stockholders.
Nineteen ninety-seven will mark our twentieth anniversary as a Company. Although
we have enjoyed a successful two decades, we understand that the competitive
nature of our business requires us to work even harder to continue to fulfill
our customers' needs. We are committed to remaining the healthcare partner of
choice, and are confident we will continue to build the kind of company you can
take pride in.
/s/ Joseph Meringola
Joseph R. Meringola
Chairman of the Board
(Chief Executive Officer)
/s/ Paul D. Meringola
Paul D. Meringola
President
(Chief Operating Officer)
4
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Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Fiscal 1996 Compared to Fiscal 1995
Net sales for the fiscal year ended March 31, 1996 increased 11% to $38,846,000
from $35,111,000 for the fiscal year ended March 31, 1995. The increase in net
sales was primarily attributable to a $3,014,000 or 19% increase in net sales of
laparotomy sponges, a $1,420,000 or 83% increase in net sales of the QuanTech
product line and $1,157,000 in net sales of the products acquired from Lawson
Mardon Medical Products, Inc. in January 1996. These increases were partially
off-set by a $793,000 or 6% decrease in net sales of operating room towels and a
$986,000 decrease in net sales of lower margin international gauze products. Net
sales of laparotomy sponges increased 24% in unit sales and net sales of
operating room towels decreased by 11% in unit sales. Management believes that
the increase in net sales of laparotomy sponges was primarily due to greater
domestic market penetration. The Company also benefited from a full year of net
sales from the QuanTech product line, which was acquired in August 1994. It is
anticipated that the Company will continue to de-emphasize its attention on
international sales of gauze products, which are typically at lower margins, and
focus on continuing to aggressively introduce new products, either by internal
development or acquisition.
The Company presently obtains substantially all of its raw materials for
operating room towels from China. These operating room towels are designated as
a textile, for which an export visa is required. These export visas have
continued to adversely impact the availability and pricing of operating room
towels. While the Company cannot predict whether or not these conditions will
continue during fiscal 1997, the Company has accelerated its procurement of
operating room towels from China and, to a lesser extent, secured operating room
towels from sources outside of China. Management believes that it will be able
to meet the Company's requirements of operating room towels for fiscal 1997.
Gross profit increased $1,875,000, or 30%, to $8,157,000 for the fiscal year
ended March 31, 1996, as compared to $6,282,000 for the prior fiscal year. Gross
profit as a percentage of sales for the fiscal year ended March 31, 1996
increased to 21.0% from 17.9% for the prior fiscal year. The increase in gross
profit dollars and percentage was primarily attributable to the increase in net
sales, improved efficiencies at the Company's manufacturing facilities in North
Carolina and increased selling prices of operating room towels, which have been
partially off-set by increases in the cost of raw materials from China.
Selling, general and administrative expenses increased by $255,000 to $6,087,000
for the fiscal year ended March 31, 1996 from $5,832,000 for the prior fiscal
year. This increase was primarily attributable to selling expenses associated
with achieving higher net sales and the introduction of new products resulting
from the recent acquisitions. As a percentage of net sales, selling, general and
administrative expenses decreased to 15.7% for the fiscal year ended March 31,
1996 as compared to 16.6% for the fiscal year ended March 31, 1995 due to
management's efforts to control and reduce expenses wherever possible.
Interest expense increased 24% from $696,000, or 2.0% of net sales, to $865,000,
or 2.2% of net sales, for the fiscal years ended March 31, 1995 and 1996,
respectively. The increase in interest expense was attributable to an increase
in the prime lending rate in addition to an increase in the average principal
loan balances outstanding during the year ended March 31, 1996 as compared to
the year ended March 31, 1995. The increase in principal loan balances
outstanding during the year was primarily attributable to higher inventory
levels of operating room towels and to a full year of outstanding borrowings
incurred in connection with the acquisition of QuanTech, Inc. in August 1994.
Net income for the fiscal year ended March 31, 1996 was $711,000, or $.09 per
share, as compared to a net loss of $183,000, or $.02 per share, for the fiscal
year ended March 31, 1995. The increase in net income was attributable to the
increase in net sales and gross profits, which were partially off-set by an
increase in selling, general and administrative expenses and an increase in
interest expense.
Fiscal 1995 Compared to Fiscal 1994
Net sales for the year ended March 31, 1995 decreased 4% to $35,111,000 from
$36,457,000 for the year ended March 31, 1994. The decrease in net sales was
primarily attributable to a $3,812,000 or 20% decrease in net sales of
laparotomy sponges and $611,000 or 38% decrease in international sales of gauze
products, partially offset by $1,697,000 in sales of the recently acquired
QuanTech product line and a $1,471,000 or 13% increase in sales of operating
room towels. Net sales of operating room towels and laparotomy sponges decreased
in unit sales 3% and 21%, respectively. Net sales of gauze products increased
16% in unit sales and $384,000 in sales dollars. Management believes that the
decrease in laparotomy sponge sales was caused primarily by the liquidation of
laparotomy sponge inventories held by distributors at March 31, 1994 due to the
recall of sterile laparotomy sponges by the Company's competitors in fiscal
1994, and the loss of certain business from the prior year. The decrease in
international sales of gauze products was due primarily to an individual
contract with an international trading partner that was not as substantial
during fiscal 1995 compared to fiscal 1994. Sales from the QuanTech product line
resulted from the acquisition of substantially all of the assets of QuanTech,
Inc. on August 12, 1994.
The Company presently obtains substantially all of its raw materials for
operating room towels from China. These operating room towels are designated as
a textile, for which an export
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visa is required. These export visas, together with a worldwide cotton shortage,
has continued to adversely impact the availability and pricing of operating room
towels. In anticipation that these conditions will continue during fiscal 1996,
the Company has begun securing operating room towels from sources outside of
China. Management presently anticipates that it will be able to develop the
necessary alliances to meet the Company's requirements of operating room towels
for fiscal 1996. The financial results for the past year reflect these supply
disruptions and pricing pressures.
Gross profit decreased $1,881,000, or 23% to $6,282,000 for the fiscal year
ended March 31, 1995 as compared to $8,163,000 for the prior fiscal year. Gross
profit as a percentage of sales for the fiscal year ended March 31, 1995
decreased to 17.9% from 22.4% for the prior fiscal year. The decrease in gross
profit dollars and percentage were attributable to the incremental costs
associated with the Company's sterilization protocol in the aftermath of the
September 1993 product recall, significant increases in the current fiscal year
in the cost of raw materials imported from China (which have been partially
offset by increases in selling prices) and a decrease in net sales. Management
believes that the cost increases will continue to adversely affect the Company's
gross profits in the future unless the Company can gain a commensurate increase
in selling prices or such cost increases are reduced.
Selling, general and administrative expenses decreased by $11,000 to $5,832,000
for the year ended March 31, 1995 from $5,843,000 for the prior fiscal year. The
decrease in these expenses was primarily attributable to the elimination of
expenses associated with the launch of the Company's collagen product line in
the prior fiscal year. The Company terminated this product line in August 1993.
As a percentage of net sales, selling, general and administrative expenses
increased to 16.6% for the fiscal year ended March 31, 1995 as compared to 16.0%
for the fiscal year ended March 31, 1994.
Net interest expense increased 67% from $418,000, or 1.1% of net sales, to
$696,000 or 2.0% of net sales for the fiscal years ended March 31, 1994 and
1995, respectively. The increase in interest expense was attributable to an
increase in the prime lending rate in addition to an increase in the average
principal loan balance outstanding during the twelve months ended March 31, 1995
as compared to the twelve months ended March 31, 1994.
Net loss for the fiscal year ended March 31, 1995 was $183,000, or $.02 per
share, as compared to net income of $392,000, or $.05 per share for the fiscal
year ended March 31, 1994. The decrease in net income was primarily attributable
to the decline in net sales dollars coupled with the aforementioned increase in
the cost of raw materials resulting in the decrease in gross profit as a
percentage of net sales, as well as the increase in interest expense.
Liquidity and Capital Resources
Current assets have increased $1,320,000 to $17,702,000 at March 31, 1996 from
$16,382,000 at March 31, 1995. The increase was primarily attributable to a
$1,374,000 increase in inventory, of which $1,060,000 represented an increase in
operating room towels. The Company increased its inventory of operating room
towels in anticipation of import quota limitations in calendar 1995, similar to
those experienced in calendar 1994. The Company had working capital of
$10,334,000 with a current ratio of 2.40 at March 31, 1996 as compared to
working capital of $11,006,000 with a current ratio of 3.05 at March 31, 1995.
Total borrowings outstanding exclusive of the promissory note due Lawson Mardon,
were $8,769,000 with a debt to equity ratio of .71 at March 31, 1996 as compared
to $10,872,000 with a debt to equity ratio of .97 at March 31, 1995. The
decrease in total borrowings outstanding at year-end is primarily due to
increased cash flow from operations, and collections of other receivables.
On October 24, 1995, the Company signed a Third Amended and Restated Revolving
Credit Note and Agreement with its existing bank. The Agreement, which expires
on September 30, 1998, maintained the borrowing limit of $10,000,000. The Credit
Agreement bears interest at 1/4% over the prime lending rate, a decrease of 1/4%
from the previous agreement, and has a $4,000,000 sublimit for bankers
acceptances, which bear interest at 1-1/2% over the prevailing bankers
acceptance rate, and a $2,000,000 sublimit for letters of credit. Long term
funds available under this Agreement amounted to $3,731,000 at March 31, 1996 as
defined in the borrowing base formula. The loan amount is collateralized by all
of the assets of the Company and contains certain restrictive covenants, which
among other matters, impose limitations with respect to the incurrence of liens,
payment of dividends, guarantees, mergers, acquisitions, capital expenditures
and specified sales of assets. At March 31, 1996, the Company was in compliance
with all such covenants and financial ratios.
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 its working capital requirements for
fiscal 1997. Management believes that it will be able to meet the anticipated
demand for operating room towels for fiscal 1997.
The Company believes that the relatively moderate rates of inflation in 1996 and
1995 have not had a significant impact on sales and profitability.
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Consolidated Balance Sheets MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
- -------------------------------------------------- --------------------------
March 31, 1996 1995
- -------------------------------------------------- ----------- -----------
Assets
Current assets:
Cash ........................................... $ 503,927 $ 545,129
Accounts receivable, less allowance
for doubtful accounts of $110,953 at
March 31, 1996 and March 31, 1995 ............ 6,010,649 6,041,381
Inventories (Note 2) ........................... 10,578,598 9,204,130
Prepaid expenses ............................... 278,400 331,758
Other current assets (Note 6) .................. 330,212 259,879
- -------------------------------------------------- ----------- -----------
Total current assets ............................. 17,701,786 16,382,277
Property and equipment, at cost, less
accumulated depreciation of $3,970,656
at March 31, 1996 and $3,631,455 at
March 31, 1995 (Notes 4, 9 and 10) ............. 3,634,476 4,343,760
Investment in joint ventures (Note 5) ............ 581,135 666,135
Other receivables, less current
portion (Note 6) ............................... -- 320,883
Excess of cost over net assets acquired,
less accumulated amortization of
$217,425 at March 31, 1996 and $85,333
at March 31, 1995 (Note 3) ..................... 2,452,119 2,482,227
Other assets ..................................... 20,820 133,320
- -------------------------------------------------- ----------- -----------
Total assets ..................................... $24,390,336 $24,328,602
- -------------------------------------------------- ----------- -----------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ............................... $ 1,393,283 $ 1,433,370
Accrued expenses, payroll and
payroll taxes ................................ 724,462 352,082
Accrued income taxes ........................... 128,314 10,607
Current portion of capital lease
obligations (Note 9) ......................... 20,511 10,333
Notes payable to bank (Note 10) ................ 3,993,215 2,997,280
Other note payable (Note 11) ................... 641,845 --
Current portion of long-term
debt (Note 10) ............................... 465,657 572,851
- -------------------------------------------------- ----------- -----------
Total current liabilities ........................ 7,367,287 5,376,523
Deferred income taxes (Note 8) ................... 361,724 414,262
Capital lease obligations,
less current portion (Note 9) .................. 77,416 26,270
Long-term debt, less current portion (Note 10) ... 4,310,542 7,302,356
- -------------------------------------------------- ----------- -----------
12,116,969 13,119,411
Shareholders' equity (Notes 10 and 12):
Common stock, 15,000,000 shares authorized,
$.001 par value; issued 8,199,789 shares
at March 31, 1996 and 8,002,289 shares
at March 31, 1995 ............................ 8,200 8,002
Additional paid-in capital, net of deferred
compensation of $417,484 at March 31, 1996
and $532,124 at March 31, 1995 ............... 8,005,582 7,652,347
Retained earnings .............................. 4,259,585 3,548,842
- -------------------------------------------------- ----------- -----------
Total shareholders' equity ....................... 12,273,367 11,209,191
Commitments (Note 9)
- -------------------------------------------------- ----------- -----------
Total liabilities and shareholders' equity ....... $24,390,336 $24,328,602
- -------------------------------------------------- ----------- -----------
See accompanying notes.
7
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<TABLE>
<CAPTION>
Consolidated Statements of Operations MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
- ------------------------------------------- -------------------------------------------
Year ended March 31, 1996 1995 1994
- ------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net sales (Note 15) ....................... $ 38,846,290 $ 35,111,326 $ 36,457,455
Cost of sales ............................. 30,689,411 28,829,516 28,294,436
- ------------------------------------------- ------------ ------------ ------------
Gross profit .............................. 8,156,879 6,281,810 8,163,019
- ------------------------------------------- ------------ ------------ ------------
Selling, general and
administrative expenses ................. 6,087,447 5,832,252 5,842,560
Loss from product recall (Note 14) ........ -- -- 1,254,000
Interest expense, net ..................... 865,122 696,253 417,736
- ------------------------------------------- ------------ ------------ ------------
6,952,569 6,528,505 7,514,296
- ------------------------------------------- ------------ ------------ ------------
Income (loss) before income taxes and
cumulative effect of accounting change .. 1,204,310 (246,695) 648,723
Income tax expense (benefit)
(Notes 1 and 8) ......................... 493,567 (63,549) 216,620
- ------------------------------------------- ------------ ------------ ------------
Net income (loss) before cumulative effect
of accounting change .................... 710,743 (183,146) 432,103
Cumulative effect of change in accounting
for income taxes (Note 1) ............... -- -- (40,000)
- ------------------------------------------- ------------ ------------ ------------
Net income (loss) ......................... $ 710,743 $ (183,146) $ 392,103
- ------------------------------------------- ------------ ------------ ------------
Net income (loss) per common share
before cumulative effect of accounting
change (Note 1) ......................... $ .09 $ (.02) $ .06
Net income (loss) per common share (Note 1) $ .09 $ (.02) $ .05
- ------------------------------------------- ------------ ------------ ------------
</TABLE>
See accompanying notes.
8
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
- --------------------------------- -------------------------------------------------------------------------------------
Total
Common Stock Paid-In Deferred Retained Shareholders'
Shares Amount Capital Compensation Earnings Equity
- --------------------------------- --------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993 ....... 7,443,182 $ 7,443 $ 7,334,923 $ (241,867) $ 3,339,885 $10,440,384
Issuance of common stock:
Pursuant to Restricted Manage-
ment Stock Bonus Plan ....... 115,000 115 229,885 (230,000)
On exercise of stock options
and warrants ................ 41,000 41 57,497 57,538
Amortization of
deferred compensation ......... 37,890 37,890
Cancellation of stock pursuant
to Restricted Management
Stock Bonus Plan ............ (9,375) (9) (23,429) 23,438
Common stock repurchased by the
Company and retired (Note 7) .. (53,783) (54) (215,078) (215,132)
Tax benefit from vesting of stock
under Restricted Management
Stock Bonus Plan and exercise
of non-qualified options .. 120,733 120,733
Net income ...................... 392,103 392,103
- --------------------------------- --------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1994 ....... 7,536,024 7,536 7,504,531 (410,539) 3,731,988 10,833,516
Issuance of common stock:
Pursuant to Restricted Manage-
ment Stock Bonus Plan ....... 80,000 80 199,920 (200,000)
Shares issued for QuanTech,
Inc. acquisition (Note 3) ... 453,408 453 652,453 652,906
Amortization of deferred
compensation .................. 55,915 55,915
Cancellation of stock pursuant
to Restricted Management
Stock Bonus Plan ............ (10,000) (10) (22,490) 22,500
Common stock repurchased by the
Company and retired (Note 7) .. (57,143) (57) (149,943) (150,000)
Net loss ........................ (183,146) (183,146)
- --------------------------------- --------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1995 ....... 8,002,289 8,002 8,184,471 (532,124) 3,548,842 11,209,191
Issuance of common stock:
On exercise of stock options .. 207,500 208 159,357 159,565
Amortization of deferred
compensation .................. 114,640 114,640
Common stock received and retired
in lieu of cash for exercise of
stock options ................. (10,000) (10) (17,490) (17,500)
Tax benefit from vesting of
stock under Restricted Stock
Bonus Plan and exercise of
non-qualified options ......... 96,728 96,728
Net income ...................... 710,743 710,743
- --------------------------------- --------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1996 ....... 8,199,789 $ 8,200 $ 8,423,066 $ (417,484) $ 4,259,585 $12,273,367
- --------------------------------- --------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
9
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
- ------------------------------------------ ------------------------------------------
Year ended March 31, 1996 1995 1994
- ------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income (loss) ........................ $ 710,743 $ (183,146) $ 392,103
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ........ 867,851 810,317 654,656
Cumulative effect of change in
accounting for income taxes ........ -- -- 40,000
Deferred income taxes ................ (52,538) (69,388) 50,000
Deferred compensation ................ 114,640 55,915 37,890
Loss on sale of property and equipment 14,324 -- --
Changes in operating assets
and liabilities:
Accounts receivable ................ 870,426 (1,255,535) 784,187
Inventories ........................ (1,241,479) (1,443,192) 1,109,059
Prepaid expenses, other current
assets and other receivables ..... 395,908 (80,612) 347,542
Recoverable income taxes ........... -- 170,071 --
Other assets ....................... -- 1,017 121,050
Accounts payable ................... (183,091) (16,904) (972,094)
Accrued income taxes ............... 214,436 10,607 (266,217)
Accrued expenses, payroll and
payroll taxes .................... 372,380 (133,973) 156,111
- ------------------------------------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ................... 2,083,600 (2,134,823) 2,454,287
Investing activities
Purchase price and related acquisition
costs (Note 3) ......................... (75,871) -- --
Purchases of property and equipment ...... (50,459) (157,013) (769,931)
Proceeds from sale of property,
plant and equipment .................... 188,100 -- --
Loan to Chairman of the Board ............ (60,000) -- --
Repayment of loan to Chairman of the Board 60,000 -- --
Loan to officer--net (Note 7) ............ -- -- (159,375)
- ------------------------------------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities ................... 61,770 (157,013) (929,306)
Financing activities
Proceeds from revolving line of credit
and long-term borrowings ............... 3,233,803 6,593,367 9,707,647
Principal payments on revolving line of
credit, term loan, long-term debt and
capital lease obligations .............. (5,562,440) (4,252,490) (11,260,293)
Proceeds from exercise of common stock
purchase warrants and employee stock
options ................................ 142,065 -- 57,538
Purchase of common stock into treasury
and retired (Note 7) ................... -- -- (77,889)
- ------------------------------------------ ------------ ------------ ------------
Net cash (used in) provided by financing
activities ............................. (2,186,572) 2,340,877 (1,572,997)
- ------------------------------------------ ------------ ------------ ------------
(Decrease) increase in cash .............. (41,202) 49,041 (48,016)
Cash at beginning of year ................ 545,129 496,088 544,104
- ------------------------------------------ ------------ ------------ ------------
Cash at end of year ...................... $ 503,927 $ 545,129 $ 496,088
- ------------------------------------------ ------------ ------------ ------------
Supplemental disclosures:
Interest paid .......................... $ 875,923 $ 809,305 $ 536,244
- ------------------------------------------ ------------ ------------ ------------
Income taxes paid ...................... $ 336,478 $ -- $ 416,779
- ------------------------------------------ ------------ ------------ ------------
</TABLE>
See accompanying notes.
10
<PAGE>
Notes to Consolidated Financial Statements MEDICAL ACTION INDUSTRIES INC.
March 31, 1996 AND SUBSIDIARY
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
Medical Action Industries Inc. and its wholly-owned subsidiary, South Mountain
Medical, Inc. which was merged into Medical Action Industries Inc. effective
April 1, 1994. All significant intercompany balances and transactions are
eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Leases meeting the criteria for
capitalization are recorded at the present value of future lease payments.
Maintenance and repairs are charged to operations as incurred and expenditures
for major improvements are capitalized. The carrying amount and related
accumulated depreciation of assets sold or otherwise disposed of are removed
from the accounts and any resulting gain or loss is reflected in operations in
the year of disposal. Depreciation of property and equipment is provided on a
straight-line basis over the estimated useful lives of the related assets
(buildings--40 years; factory equipment--10 to 20 years; fixtures and other
equipment--3 to 5 years). Amortization of leasehold improvements and capital
leases is provided on the straight-line method over the period of their economic
or related lease lives, whichever is less, and is included in depreciation
expense.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement No.
109, "Accounting for Income Taxes". The Company adopted the provisions of the
new standard in its financial statements for the year ended March 31, 1994. The
cumulative effect as of April 1, 1993 of adopting SFAS No. 109 decreased fiscal
1994 net income by $40,000, or $.01 per share.
Revenue Recognition
The Company recognizes income (sales) as products are shipped.
Concentration of Credit Risk
The Company manufactures and distributes disposable medical products principally
to medical product distributors, hospital buying groups and hospitals located
throughout the United States.
The Company performs credit evaluations of its customers' financial condition
and does not require collateral. Receivables are generally due within 60-90
days. Credit losses relating to customers have historically been minimal and
within management's expectations. (See Note 15 for major customers.)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Per Share Information
Net income (loss) per common share is computed using the weighted average number
of common shares and dilutive common equivalent shares outstanding, if
applicable. Shares used in the computation amounted to 8,247,646, 7,842,964 and
7,746,776 for the years ended March 31, 1996, 1995 and 1994, respectively.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement 121 in the first
quarter of fiscal 1997 and, based on current circumstances, does not believe the
effect of adoption will be material.
Reclassification
Certain prior year balances have been reclassified to conform with the current
years' presentation.
2. Inventories Inventories consist of the following:
------------------------------------------------------------
March 31, 1996 1995
------------------------------------------------------------
Finished goods ............... $ 3,973,422 $ 3,548,019
Raw materials ................ 6,605,176 5,656,111
------------------------------------------------------------
Total ........................ $10,578,598 $ 9,204,130
------------------------------------------------------------
3. Acquisition
On January 30, 1996, the Company acquired certain assets of the sterilization
packaging, monitoring and contamination control products business of Lawson
Mardon Medical Products, Inc. ("SBW"). The purchase price for the acquired
assets consisted of $25,000 in cash and a promissory note in the amount of
$855,793. In addition, the Company acquired approximately $527,000 of SBW
inventory on a consignment basis and is required to purchase substantially all
remaining unsold inventory by August, 1996. The acquisition has been accounted
for as a purchase and the operations of SBW have been included in the Company's
Statement of Operations since the acquisition date. The excess of the purchase
price and related expenses over the net assets acquired amounted to $75,871 and
is being amortized over ten (10) years ($1,265 as of March 31, 1996).
On August 12, 1994, the Company acquired substantially all of the assets and
certain liabilities of QuanTech, Inc. ("QuanTech"). QuanTech's business
consisted of the manufacture and distribution of disposable surgical supplies
and a patented light handle cover used primarily in operating rooms of hospitals
and out-patient surgical centers. The purchase price
11
<PAGE>
consisted of the issuance of 453,408 unregistered shares of the Company's common
stock in addition to the assumption of $1,941,000 of the fair value of net
liabilities assumed in excess of assets acquired.
Further, if QuanTech's operations achieve certain gross profit levels, as
defined in the agreement, during any consecutive 12 month period through July
1996 the purchase price would be adjusted by the issuance of up to another
250,000 shares of the Company's common stock. Management does not believe that
such additional shares will be issued. The acquisition has been accounted for as
a purchase and the operations of QuanTech have been included in the Company's
Statement of Operations since the acquisition date. The aggregate of the
purchase price and the net liabilities assumed totaling $2,594,000 is being
amortized over twenty (20) years ($216,160 and $85,333 as of March 31, 1996 and
1995, respectively).
4. Property and Equipment
Property and equipment (including those arising from capital leases) are
summarized as follows:
------------------------------------------------------------
March 31, 1996 1995
------------------------------------------------------------
Building ......................... $1,550,000 $1,550,000
Factory equipment ................ 4,818,896 5,261,919
Furniture and fixtures ........... 483,229 483,229
Leasehold improvements ........... 550,259 550,259
Capital leases--equipment ........ 97,063 24,123
Automobiles and trucks ........... 105,685 105,685
------------------------------------------------------------
7,605,132 7,975,215
Less accumulated depreciation
and amortization ............... 3,970,656 3,631,455
------------------------------------------------------------
$3,634,476 $4,343,760
------------------------------------------------------------
5. Investment in Joint Ventures
In March 1989, the Company entered into a joint venture agreement with a
supplier in the Peoples Republic of China. The name of the joint venture
company, in which the Company holds an equity interest of 40%, is Wujiang Action
Medical Material Company Limited. Through fiscal 1991 the Company had
contributed equipment in the amount of $680,000 and cash in the amount of
$153,000.
In fiscal 1990, the Company entered into a second joint venture agreement with
another supplier in the Peoples Republic of China. The name of the joint venture
company, in which the Company holds an equity interest of 31%, is Zhejiang East
Asia Medical Material Co. Limited. The Company contributed $212,000 to this
joint venture through fiscal 1993.
The purpose of both joint ventures, which became operational in January 1990, is
to manufacture disposable medical towels, gauze sponges, lap sponges and other
medical material for sale by the Company. As a result of the economic and other
uncertainties of doing business in the Peoples Republic of China, and the
Company's inability to exercise significant influence over certain policies of
the joint ventures, the Company does not follow the equity method of accounting
with respect to these joint ventures. These investments are treated as deferred
costs incurred to obtain a reliable supply of quality products and, accordingly,
the Company is amortizing the costs of its investments over the initial 15 year
term of the joint venture agreements ($85,000 in 1996, $84,000 in 1995 and
$84,000 in 1994.)
6. Other Receivables
During fiscal 1989, the Company purchased a bleachery system with the intention
of placing the system in operation at one of its joint ventures in China. In
fiscal 1992, the Company entered into an agreement and sold the equipment to one
of its joint venture affiliates in China (Zhejiang East Asia Medical Material
Co. Limited--"the buyer"). Under the terms of the agreement, the buyer will
supply to the Company at no cost, surgical sponges valued at $1,140,000 (which
approximates the Company's acquisition and installation costs) over a period of
six years. Through March 31, 1996, the Company has received approximately
$966,000 of surgical sponges under this agreement. The anticipated amount of the
surgical sponges to be received in fiscal 1997 ($174,000) has been included in
other current assets.
7. Related Party Transactions
In April 1993, the Company purchased and simultaneously retired 53,783 shares of
its common stock from its Chairman of the Board, Joseph R. Meringola. These
shares were acquired by the Company at their fair market value on such date
($215,132), of which $137,243 was applied in full satisfaction of his
outstanding loan of that amount.
In May 1994, the Company purchased and simultaneously retired 57,143 shares of
its common stock from Joseph R. Meringola. These shares were acquired by the
Company at their fair market value on such date ($150,000), which was applied in
full satisfaction of his outstanding loan of that amount.
8. Income Taxes
Income tax (benefit) expense consists of the following:
------------------------------------------------------------
March 31, 1996 1995 1994
------------------------------------------------------------
Current:
Federal ......... $ 471,278 $ 5,839 $ 125,304
State ........... 74,827 -- 41,316
Deferred .......... (52,538) (69,388) 50,000
------------------------------------------------------------
493,567 $ (63,549) $ 216,620
------------------------------------------------------------
Deferred taxes relate to differences between the tax basis of certain assets and
liabilities and their financial reporting amounts. The principal types of such
differences relate to accelerated depreciation, inventory and allowances for bad
debts.
12
<PAGE>
The following table indicates the significant elements contributing to the
difference between the statutory federal tax rate to the Company's effective tax
rate for 1996, 1995 and 1994:
-------------------------------------------------------------
March 31, 1996 1995 1994
-------------------------------------------------------------
Statutory rate ................. 34.0% (34.0)% 34.0%
Research and development
tax credit ................... -- -- (7.1)
State taxes .................... 4.1 (2.6) 4.9
Nondeductible expenses ......... 4.0 14.9 1.6
Other .......................... (1.1) (4.1) --
-------------------------------------------------------------
Effective tax rate ............. 41.0% (25.8)% 33.4%
-------------------------------------------------------------
9. Leases
The Company leases various warehouse and office space under noncancellable
operating leases expiring at various times through fiscal 1999. The Company also
leases certain equipment and vehicles under noncancellable capital and operating
leases expiring in various years through fiscal 2000.
The following is a schedule of future minimum payments, by year and in the
aggregate, under capital leases and noncancellable operating leases with initial
or remaining terms of one year or more at March 31, 1996:
--------------------------------------------------------------------
Capital Operating
Leases Leases
--------------------------------------------------------------------
1997 ............................. $ 28,314 $ 298,006
1998 ............................. 26,216 201,346
1999 ............................. 23,916 183,685
2000 ............................. 24,413 1,864
2001 ............................. 16,621 --
--------------------------------------------------------------------
Total minimum lease payments ..... $ 119,480 $ 684,901
--------------------------------------------------------------------
Amounts representing interest .... 21,553
----------------------------------------------------
Present value of net minimum
lease payments ($20,511 of
which is current) .............. $ 97,927
----------------------------------------------------
Equipment acquired under capital leases was $72,940 and $23,943 in fiscal 1996
and 1995, respectively. Rental expense under operating leases was $548,624,
$445,819, and $459,636 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
10. Long-Term Debt
------------------------------------------------------------------
March 31, 1996 1995
------------------------------------------------------------------
Revolving credit agreement (a) ... $2,200,000 $4,725,000
Equipment and term notes
payable (b), (c), (d) and (e) .. 1,578,773 2,021,673
Mortgage notes payable (f) ....... 997,426 1,128,534
------------------------------------------------------------------
4,776,199 7,875,207
Less current portion ............. 465,657 572,851
------------------------------------------------------------------
4,310,542 $7,302,356
------------------------------------------------------------------
(a) On October 24, 1995, the Company signed a Third Amended and Restated
Revolving Credit Note and Agreement with its existing bank. The Agreement,
which expires on September 30, 1998, maintained the borrowing limit at
$10,000,000. The credit agreement bears interest at the prime lending rate
(8.25% at March 31, 1996) plus 1/4% and has a $4,000,000 sublimit for
bankers' acceptances, which bear interest at 1-1/2% over the prevailing
banker's acceptance rate, and a $2,000,000 sublimit for letters of credit.
Banker's acceptances at March 31, 1996 and 1995 in the amount of $3,993,215
and $2,997,280, respectively, have been classified as notes payable.
Borrowings are further limited to 80% of eligible accounts receivable, as
defined, and 55% of eligible inventory, as defined, with an inventory
sublimit of $6,500,000 during the months of April through August inclusive
and $5,000,000 during the months of September through March inclusive.
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, payment of dividends, guarantees, mergers, acquisitions, capital
expenditures and specified sales of assets. The Company is also required to
maintain various financial ratios with which it is in compliance at March
31, 1996.
(b) On August 12, 1994, in connection with the QuanTech acquisition, the
Company entered into three separate credit notes payable with former
creditors of the acquired company: a revolving credit note in the amount of
$750,000, which matures on August 2, 1997 and bears interest at 1/4% over
the bank's prime lending rate; a promissory note in the amount of $137,912,
which matures on August 12, 1997 and bears interest at the rate of 8%; and
a promissory note in the amount of $125,461, which also matures on August
12, 1997 and bears interest at the rate of 8%. Each of the notes is
unsecured and requires no principal payments until their respective
maturity dates.
(c) On September 17, 1993, the Company entered into a term loan agreement with
a bank for the purchase of equipment in the amount of $700,000. The loan is
payable in six monthly installments of interest only at the rate of prime
plus 3/4% followed by fifty-six equal monthly installments of $12,500 plus
interest.
(d) On January 26, 1993, the Company entered into a term loan agreement with a
bank for $800,000 payable in equal monthly installments of $16,700 plus
interest with the final payment due on January 27, 1997. The term loan
bears interest at the rate of prime plus 3/4% and is secured by equipment
of the Company.
(e) In March 1990, the Company financed the construction of its inhouse
sterilizer facility with a demand note payable of $655,000, which in
September 1990, was refinanced into a
13
<PAGE>
five year term loan agreement with another bank for $555,000 payable in
monthly installments of $9,250 plus interest at prime plus 1/2%. This note
was fully repaid during the year ended March 31, 1996.
(f) In April 1990, the Company completed the purchase of its Asheville, North
Carolina manufacturing facility from a related entity. The purchase of the
facility was financed with a twenty (20) year mortgage note payable which
requires payments of principal and interest aggregating $19,300 per month.
The mortgage bears interest at the prime lending rate plus 1/2%.
Maturities of long term debt are as follows at March 31, 1996:
-----------------------------------------------
1997 .......................... $ 465,657
1998 .......................... 1,327,316
1999 .......................... 2,478,879
2000 .......................... 195,173
2001 .......................... 212,953
Thereafter .................... 96,221
-----------------------------------------------
$4,776,199
-----------------------------------------------
The carrying amounts of the Company's long term debt approximate their fair
value at March 31, 1996.
11. Other Note Payable
In January 1996, in connection with the acquisition of SBW (See Note 3), the
Company signed a promissory note in the amount of $855,793. The note is payable
in four (4) equal monthly installments commencing on March 1, 1996, and is
subject to certain reductions based on the Company's collection of the accounts
receivable purchased. The note bears interest at the prime lending rate.
12. Shareholders' Equity and Stock Plans
On August 12, 1994 the Company issued 453,408 shares of common stock in
connection with the acquisition of substantially all the assets and certain
liabilities of QuanTech (See Note 3).
In 1984, the Company's Board of Directors and stockholders approved an Incentive
Stock Option Plan (the "Incentive Option Plan"). The Incentive Option Plan,
which expired in May 1994, authorized the granting to key employees of options
to purchase an aggregate of 350,000 shares of the Company's common stock at the
fair market value at the date of grant. Options vest over a two year period and
expire five years from date of grant unless employment is terminated, in which
event, subject to certain exceptions, the options terminate three months
subsequent to date of termination. At March 31, 1995, there were no shares
available for granting of future options. The number of shares exercisable at
March 31, 1996, 1995 and 1994 were 147,500, 147,500 and 162,670, respectively.
During fiscal 1990, the Company's Board of Directors and stockholders approved a
Non-Qualified Stock Option Plan (the "Non-Qualified Option Plan"). The
Non-Qualified Option Plan, as amended, authorizes the granting to employees of
the Company options to purchase an aggregate of 1,150,000 shares of the
Company's common stock. The options are granted at the fair market price or at a
value that is not less than 85% of the fair market value on the date of grant.
The options are exercisable in two equal installments on the first and second
anniversary of the date of grant. Options expire five years from the date of
grant unless the employment is terminated, in which event, subject to certain
exceptions, the options terminate two months subsequent to date of termination.
At March 31, 1996 there were 50,500 shares available for granting of future
options. The number of shares exercisable at March 31, 1996, 1995 and 1994 were
349,500, 407,750 and 237,250, respectively.
Option activity under the option plans during the three years ended March 31,
1996 is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------ --------------------------------------------------------------------------------------------
Incentive Option Plan Non-Qualified Option Plan 1994 Stock Incentive Plan
Number of Option Price Number of Option Price Number of Option Price
Shares Per Share Shares Per Share Shares Per Share
- ------------------------------ --------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993 .... 176,170 $1.875-$2.50 660,250 $.60-$4.125 -- --
Granted .................... -- -- 180,000 $2.00-$3.25 -- --
Exercised .................. (13,500) $1.875-$2.50 (27,500) $.60-$1.41 -- --
Cancelled .................. -- -- (75,000) $4.00 -- --
- ------------------------------ ------- ------------ -------- ----------- ------- ----------
Balance at March 31, 1994 .... 162,670 $1.875-$2.50 737,750 $.60-$4.125 -- --
Granted .................... -- -- 13,000 $1.31-$2.50 -- --
Exercised .................. -- -- -- -- -- --
Cancelled .................. (15,170) $1.875 (84,250) $.60-$4.125 -- --
- ------------------------------ ------- ------------ -------- ----------- ------- ----------
Balance at March 31, 1995 .... 147,500 $2.50 666,500 $.60-$4.125 -- --
Granted .................... -- -- 268,000 $.97-$2.14 270,000 $.97-$2.19
Exercised .................. -- -- (207,500) $.60-$.875 -- --
Cancelled .................. -- -- (108,500) $.97-$3.25 -- --
- ------------------------------ ------- ------------ -------- ----------- ------- ----------
Balance at March 31, 1996 .... 147,500 $2.50 618,500 $.97-$4.125 270,000 $.97-$2.19
- ------------------------------ ------- ------------ -------- ----------- ------- ----------
</TABLE>
14
<PAGE>
In 1984, the Company's Board of Directors and stockholders approved a Restricted
Management Stock Bonus Plan (the "Bonus Plan"). Under the Bonus Plan, which
expired in May 1994, 500,000 shares of the Company's common stock may be sold to
executives and other key salaried employees at par value ($.001 per share).
Shares issued under the Bonus Plan vest in four equal installments on the
second, third, fourth and fifth anniversaries of the date of issuance. Except
for those shares which have vested, shares issued under the Bonus Plan may not
be sold, transferred or otherwise disposed of unless they are first offered to
the Company at par value. At March 31, 1996, 489,563 shares had been issued, of
which 315,063 have vested.
In 1994, the Company's Board of Directors and stockholders approved the 1994
Stock Incentive plan (the "Incentive Plan"), which covers 500,000 shares of the
Company's common stock. The Incentive Plan, which expires in 2004, permits the
granting of incentive stock options, shares of restricted stock and nonqualified
stock options. All officers and key employees of the Company and its affiliates
are eligible to participate in the Incentive Plan. The Incentive Plan is
administered by the Stock Option Committee of the Board of Directors, which
determines the persons to whom, and the times at which awards will be granted.
In addition, the Stock Option Committee decides the type of awards to be granted
and all other related terms and conditions of the awards. The per share exercise
price of any option may not be less than the fair market value of a share of
common stock at the time of grant. Options outstanding at March 31, 1996 vest in
two equal installments on the first and second anniversary of the date of grant.
Options granted in the future may have different vesting schedules. At March 31,
1996, there were 230,000 shares available for granting of future options. None
of the options granted were exercisable at March 31, 1996.
The Company records deferred compensation related to options and shares issued
pursuant to its Non-Qualified Option Plan and Bonus Plan, respectively, equal to
the differences between the market value of its common stock at the date of
grant and the option exercise price or the stock issuance price (par value).
Such deferred compensation is deducted from shareholders' equity and is
amortized to expense over the vesting period.
Pursuant to an employment agreement expiring in August 1997, the Board of
Directors approved the issuance of a five-year warrant to purchase the Company's
common stock to the former principal stockholder of QuanTech, Inc. The warrant,
which expires on August 10, 1999, permits the holder to purchase 80,592 shares
of common stock at $2.1875 per share, the market value on the date of grant.
13. Retirement Plan
Effective April 1, 1988, the Company adopted a retirement plan for all of its
employees pursuant to section 401(k) of theInternal Revenue Code. Subject to the
terms and conditions of the plan, each eligible employee may contribute up to
15% of his or her compensation as defined therein. In addition, the Plan
provides for a discretionary matching company contribution of 50% of the
employee's contribution up to a maximum of 6% of their compensation. The
Company's contribution vests over a period of four years and amounted to $10,140
in 1996, $27,262 in 1995 and $74,343 in 1994.
14. Loss from Product Recall
During the second quarter of fiscal 1994, the Company detected a mold growth on
certain of its sterile laparotomy sponges. Until management was able to satisfy
all of its concerns, the Company voluntarily suspended shipment of its sterile
laparotomy sponges for 23 days during the quarter and initiated a product
recall. As a result of the Company's efforts to understand, analyze and correct
this problem, results of operations for the year ended March 31, 1994 included a
loss from the product recall of $1,254,000. The loss from product recall
includes costs and expenses associated with the freight and re-work costs of
laparotomy sponge cases returned to the Company, professional fees, laboratory
testing fees and related contractual expenses.
15. Other Matters
a. The Company operates in one industry, disposable medical products.
b. The Company presently obtains substantially all of its raw materials for
operating room towels from China. These operating room towels are
designated as a textile, for which an export visa is required. These export
visas have continued to adversely impact the availability and pricing of
operating room towels. While the Company cannot predict whether or not
these conditions will continue during fiscal 1997, the Company has
accelerated its procurement of operating room towels from China and, to a
lesser extent, secured operating room towels from sources outside of China.
Management believes that it will be able to meet the Company's requirements
of operating room towels for fiscal 1997.
c. Sales to Owens and Minor, Inc., Baxter Healthcare Hospital Supply Division
and General Medical Corporation accounted for approximately 23%, 21% and
10% of net sales, respectively, for the fiscal year ended March 31, 1996.
Sales to Baxter Healthcare Hospital Supply Division and Owens and Minor,
Inc. each accounted for approximately 19% of net sales for the fiscal year
ended March 31, 1995. Sales to Baxter Healthcare Hospital Supply Division
and Owens and Minor, Inc. accounted for approximately 24% and 11% of net
sales, respectively, for the fiscal year ended March 31, 1994.
d. Product development costs charged to income were $291,000, $211,000 and
$328,000 for the years ended March 31, 1996, 1995 and 1994, respectively.
15
<PAGE>
Statement of Management Responsibility
The financial statements included in this annual report have been prepared by
the management of Medical Action Industries Inc. which has primary
responsibility for the integrity and objectivity of the statements. The
financial statements were prepared in conformity with generally accepted
accounting principles and include, where necessary, certain estimates and
judgments by management deemed appropriate in light of existing circumstances.
Management is also responsible for maintaining a system of internal accounting
controls designed to provide reasonable assurance that transactions are properly
authorized and recorded and the Company's assets are safeguarded against
material loss and unauthorized use or disposal. To accomplish this, management
has developed prescribed policies and procedures encompassing all facets of the
Company's accounting system. These policies and procedures are continuously
monitored by management and are updated or modified as needed.
The financial statements of the Company have been audited by Ernst & Young LLP,
independent auditors. Their accompanying report is based on an audit conducted
in accordance with generally accepted auditing standards, including a review of
internal accounting controls and financial reporting matters.
The Company's Board of Directors maintains an Audit Committee consisting of
outside directors who meet periodically with management and separately with the
independent auditors to review financial reporting matters and to discuss issues
relating to their audit.
/s/ Joseph Meringola
Joseph R. Meringola, Chairman of the Board
(Chief Executive Officer)
/s/ Paul D. Meringola
Paul D. Meringola, President (Chief Operating Officer)
Report of Independent Auditors
Stockholders and Board of Directors Medical Action Industries Inc.
We have audited the accompanying consolidated balance sheets of Medical Action
Industries Inc. and subsidiary as of March 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medical Action
Industries Inc. and subsidiary at March 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Melville, N.Y.
May 24, 1996
16
<PAGE>
Corporate Information and Directory
BOARD OF DIRECTORS
Joseph R. Meringola
Chairman of the Board
Chief Executive Officer
Paul D. Meringola
President
Chief Operating Officer
Richard G. Satin
Vice President - Operations
and General Counsel
Bernard Wengrover
Certified Public Accountant
Dr. Phillip F. Corso
Clinical Instructor -
Department of Surgery, Yale
University School of Medicine;
Senior Attending and Chief of
Plastic Surgery Bridgeport and
Norwalk Hospitals
Dr. Thomas A. Nicosia
Fellow of the American College
of Cardiology. Affiliated with
St. Francis and North Shore
University Hospitals
EXECUTIVE OFFICERS
Joseph R. Meringola
Chairman of the Board
Chief Executive Officer
Paul D. Meringola
President
Chief Operating Officer
Richard G. Satin
Vice President - Operations
and General Counsel
Daniel Marsh
Vice President - Sales and Marketing
OPERATIONS MANAGEMENT
Victor Bacchioni
Corporate Controller
Hal Carpenter
National Accounts Manager
Steve Ferrera
Director of Sales and Marketing -
OEM Division
Steve Harrington
Regional Sales Manager
Michael Kuykendall
Director of Manufacturing
Richard Levinson
Regional Sales Manager
Eric Liu
Director of China Operations
Philip R. Meringola
Director of Information Systems
John Nie
Regional Sales Manager
Steve Woody
Director of Corporate
Quality Assurance
INDEPENDENT AUDITORS
Ernst & Young LLP
395 N. Service Road
Melville, New York 11747
REGISTRAR & TRANSFER AGENT
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
STOCK TRADING
Medical Action's common stock trades on the NASDAQ Stock Market under the symbol
MDCI. As of June 1, 1996, there were approximately 500 stockholders of record,
which does not include approximately 3,500 beneficial owners of shares held in
the names of brokers or other nominees. The following table sets forth, for the
periods indicated, the high and low prices per share of Medical Action Common
Stock as reported by NASDAQ:
----------------------------------------------------------------------
Fiscal 1996 Fiscal 1995
High Low High Low
----------------------------------------------------------------------
First Quarter 1-15/16 7/8 2-7/16 2
Second Quarter 2-1/2 1-1/4 1-13/16 1-1/2
Third Quarter 2-1/16 1-5/16 1-5/16 1
Fourth Quarter 2-5/8 1-7/8 1-3/16 15/16
----------------------------------------------------------------------
SEC FORM 10-K
If you would like a copy of our Annual Report on SEC Form 10-K for the fiscal
year ended March 31, 1996, you may obtain it without charge. Direct your request
to Medical Action Industries Inc., Corporate Secretary, 150 Motor Parkway,
Hauppauge, New York 11788.
COMPANY FACILITIES
Executive Offices
150 Motor Parkway
Hauppauge, New York 11788
Manufacturing and Distribution Facilities
537 Sweeten Creek Industrial Park
Asheville, North Carolina 28803
273 Cane Creek
Fletcher, North Carolina 28732
24 Buxton Avenue
Asheville, North Carolina 28801
1934 New Highway
Farmingdale, New York 11735
ANNUAL STOCKHOLDERS' MEETING
The Annual Stockholders' Meeting of Medical Action Industries Inc. will be held
on Wednesday, August 14, 1996 at Ernst & Young LLP, 395 N. Service Road, lower
level, Melville, New York. A Form of Proxy and Proxy Statement is being mailed
to stockholders of record with this report.
DUPLICATE MAILINGS
When a stockholder owns shares in more than one account or when several
stockholders live at the same address, they may receive multiple copies of the
Annual Report or other mailings.
For further information on how to eliminate multiple mailings, contact American
Stock Transfer and Trust Company at (718) 921-8293
Designed by Curran & Connors, Inc.
<PAGE>
Medical Action Industries Inc.
Executive Offices:
150 Motor Parkway
Suite 205
Hauppauge, NY 11788
(516) 231-4600
