<PAGE>
FOR TWO DECADES...
THE PARTNER
OF CHOICE
MEDICAL ACTION
INDUSTRIES INC.
[COVER ILLUSTRATION]
ANNUAL REPORT 1997
[LOGO]
<PAGE>
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 with 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
Two Decades of Accomplishment ........................................... 4
Management's Discussion and Analysis
of Financial Condition and Results
of Operations .......................................................... 5
Balance Sheets .......................................................... 7
Statements of Operations ................................................ 8
Statements of Shareholders' Equity ...................................... 9
Statements of Cash Flows ................................................ 10
Notes to Financial Statements ........................................... 11
Statement of Management Responsibility .................................. 16
Report of Independent Auditors .......................................... 16
Corporate Information and Directory ......................... Inside Back Cover
[PHOTO]
The cover of this year's Annual Report reflects Medical Action Industries'
commitment for the past twenty years of establishing and expanding strategic
partnerships throughout the supply chain and being recognized as a market leader
with a reputation for manufacturing and marketing quality products. We are proud
of our accomplishments and are even more determined to keep growing and
improving. 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. We continue to meet the ever-changing needs of the
industry and our customers. As we approach the next millennium, the
opportunities are bright for Medical Action.
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Year ended March 31, 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Operations Data
Net Sales.............................. $46,000,309 $38,846,290 $35,111,326 $36,457,455 $33,337,546
Income (loss) before income taxes
and cumulative effect of
accounting change.................... 1,642,572 1,204,310 (246,695) 648,723 2,018,059
Net income (loss)...................... 971,347 710,743 (183,146) 392,103 1,314,742
Net income (loss) per common share:
Primary.............................. .12 .09 (.02) .05 .17
Fully diluted........................ .11 .09 (.02) .05 .17
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Balance Sheet Data
Total assets........................... $24,993,552 $24,390,336 $24,328,602 $19,270,845 $21,422,559
Working capital (1).................... 10,228,286 10,334,499 11,034,593 9,020,889 10,104,504
Long-term debt including capital leases
(less current portion)............... 3,558,674 4,387,958 7,328,626 3,749,965 5,763,011
Shareholders' equity................... 13,417,942 12,273,367 11,209,191 10,883,516 10,440,384
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</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 9 to Notes to Financial Statements.
Net Sales (In millions of dollars)
[GRAPH/CHART DATA POINTS]
1997 46,000,309
1996 38,846,290
1995 35,111,326
1994 36,457,455
1993 33,337,546
1992 27,145,829
1991 26,027,843
1990 24,223,317
1989 26,626,957
1988 21,176,607
1987 17,012,582
1986 14,769,897
1985 12,020,192
1984 10,494,362
1983 7,613,551
1982 4,392,113
1
<PAGE>
Milestones - Past and Present
We are pleased to report that fiscal 1997 was the most significant year in the
history of Medical Action for establishing, expanding and cultivating strategic
partnerships throughout the supply chain. Our financial and operational momentum
continued - as we reported record revenues, improved operating profits and
successfully integrated the acquisition, completed in January 1996, of certain
assets of the sterilization packaging, monitoring and contamination control
products of Lawson Mardon Medical Products, Inc. ("Lawson Mardon").
In this annual report, we mark a very special occasion, our 20th anniversary. On
April 1, 1977, Medical Action began on a journey fueled by the entrepreneurial
spirit of its founder, Joseph R. Meringola, with the hopes and aspirations of
developing a medical product, being the best at that product and building a
distribution network second to none. Today, Medical Action is recognized as a
market leader with a reputation for manufacturing and marketing quality products
with annual sales exceeding $46 million.
While we are proud of our accomplishments, we are determined to keep growing and
improving. We realize that past triumphs do not guarantee future success, and
that we must continue to provide quality products and outstanding service to our
customers every day.
Anniversaries are times to look back and we have been reflecting on what makes
us strong today and why we are so optimistic about our future. How were we able
to start from such modest beginnings to become and maintain dominant market
leadership in the manufacture and distribution of sterile laparotomy sponges and
sterile disposable operating room towels in the United States? What is different
about Medical Action that accounts for this success? After all, companies with
far greater resources have attempted the same strategy and failed.
As we think about these questions, certain key concepts come to mind. As
reflected on the cover of this annual report, management's philosophy continues
to be one of focus on being the healthcare partner of choice. Our belief is a
total quality commitment designed to provide superior service to our customers
and exceptional returns to our stockholders. Our acquisition program has
provided us with a substantial increase in the breadth of product offerings. As
a result, we can now improve profitability by consolidating the acquired
businesses and
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"We have to know where we have been in order to know where we are going"
--John F. Kennedy
To Our Stockholders, Customers, Healthcare Partners and Teammates:
- -------------------------------------------------------------------------------
by learning to be more efficient and more effective.
While continuing to seek attractive acquisitions, we are enhancing profitability
by pursuing quality in every aspect of our business. To that end, we emphasize
training programs, study our paper flow and work processes, devise ways to
improve the productivity of our assets, and invest in state of the art
information systems and manufacturing equipment.
An important element of Medical Action's success is the ownership it instills in
its people. This ownership comes from a combination of tangible incentives and
intangible qualities that are being nurtured with great care. Medical Action
managers are expected to function as owners. They are given authority and
responsibility, and are held accountable for their performance. Our management
structure and ownership-type incentives create an environment in which employees
strive to earn the respect of their peers and the significant financial benefits
offered by our compensation system. Our managers know they are responsible for
every aspect of their operation, from planning through resource management.
Under this system, Medical Action managers can claim authorship and ownership of
their work product, leading to an end result of spirit, pride, a strong sense of
competitiveness and a drive for superior performance. On a fully diluted basis,
approximately 35% of the Company is owned by employees and directors.
Marketing Strategy
Historically, Medical Action focused on the acute care "hospital" marketplace.
As a result of this focus, Medical Action is the market leader in the sale of
sterile laparotomy sponges and sterile operating room towels. With its quality
product reputation and strong distribution network, the Company has positioned
itself as the dominant market share leader of its expanded line of disposable
medical products.
Current dynamics in the healthcare industry also contribute to the Company's
growth opportunity. Among those factors is the increasing consolidation of
manufacturers, distributors, hospitals and group purchasing organizations
("GPO"s) and the emergence of integrated delivery networks ("IDN"s). This, along
with the cost pressures of a managed care environment, is providing greater
incentives to reduce the number of duplicate vendors for each product line
distributed to hospitals and healthcare facilities. Medical Action, because of
its preferred vendor status, is strategically positioned to benefit from
increased volume as other vendors are eliminated. At the same time, there are
tough new regulatory standards for the medical device industry that present
formidable barriers to entry for new competitors wishing to enter the market.
Medical Action has traditionally used its sales force to call on individual
hospitals to create demand for its products. Increasingly, Medical Action has
expanded its national account team to properly focus on the emerging external
influences on the hospital purchasing decision, namely GPOs and distributors.
Medical Action has leveraged its domestic market share, low cost supplier
position, and its leadership in supply chain excellence to become the supplier
of choice throughout all aspects of the supply chain. We have preferred vendor
status at distributors that ship over 80 percent of the products distributed to
the hospital market. Medical Action's portfolio of sole source and/or committed
contracts with GPOs is both extensive and complete. Current contracts extending
into the next millennium include but are not limited to Premier Inc. (1,822
hospitals), VHA Inc. (1,200 hospitals), Tenet Healthcare Corp. (127 hospitals),
AmeriNet (1,903 hospitals), MedEcon (1,046 hospitals), HSCA (961 hospitals),
University HealthSystem Consortium (70 hospitals), Purchase Connection (497
hospitals) and AmeriNet Elite (351 hospitals).
As the pressures to control costs continue, new practices will lead to new
distribution strategies. One such high growth opportunity centers around the
dynamic "custom procedure tray" industry. These companies, led by Allegiance
Healthcare Corp. and Maxxim Medical, take all the components used in a surgical
procedure and neatly package and sterilize them in one tray. All of Medical
Action's products are put into these trays and the growth
2
<PAGE>
opportunity is significant. Medical Action has developed or is in the process of
developing preferred component programs with our major GPO partners. These
programs, with groups like VHA Inc., Premier Inc., University HealthSystem
Consortium and HSCA, will provide ongoing incentives to the above mentioned tray
manufacturers to use Medical Action products in their trays.
Business Objectives
Medical Action is aggressively seeking to achieve dramatic growth and consistent
profitability while pursuing a long-term objective to remain the healthcare
partner of choice. Acquisitions will enable the Company to grow quickly and
efficiently by maximizing the revenue potential of new products through its
existing channels of distribution to current customers and to new markets, such
as alternate care and physicians' offices.
For its expanding line of products, the Company is targeting all hospitals,
alternative care facilities and physician, dental and veterinary offices. At the
same time, Medical Action is aggressively expanding into the estimated $4
billion international market with all its product lines.
Management anticipates that for fiscal 1998, revenue from products developed and
acquired during the past three years will represent approximately 25 percent of
the Company's total sales. Acquisitions will continue to play an important role
in Medical Action's corporate strategy. Candidates for acquisition will be
evaluated on their ability to be accretive to earnings, add breadth to the
product lines, provide vehicles into new markets and increase the depth of the
Company's manufacturing capabilities.
Also, Medical Action's strong balance sheet and operating cash flow can readily
sustain its growth momentum. While intent on growth, the Company is pledged to
continue providing quality products and be highly adaptable to the rapidly
changing needs of the industry and its customers.
Financial Performance
We are pleased to report that Medical Action produced solid financial results
for the fiscal year ended March 31, 1997.
We achieved record revenues of $46,000,000, an 18% increase from $38,846,000 in
fiscal 1996. We are especially pleased that for the three months ended March 31,
1997 we achieved record revenues of $12,420,000, the very first time we exceeded
the $12 million mark for quarterly revenues. The record net sales level for
fiscal 1997 was primarily attributable to approximately $4,837,000 of increased
net sales generated from the Lawson Mardon product line, acquired in January
1996, a $890,000, or 7%, increase in net sales of operating room towels, as well
as increased market penetration of our QuanTech product line, whose sales
increased approximately $693,000, or 22%, and growth in net sales of laparotomy
sponges, which increased approximately $465,000, or 3%, compared to fiscal 1996.
Net income for the fiscal year ended March 31, 1997 increased 37% to $971,000,
or $.11 per share (fully diluted), versus net income of $711,000, or $.09 per
share (fully diluted), in fiscal 1996. Our balance sheet continues to reflect
our strong performance. At year end, we had a current ratio of 2.34 and working
capital of approximately $10,228,000. In addition, shareholders' equity
increased to a record $13,418,000 and has, since fiscal 1991, increased more
than 200%.
Future Outlook
For tomorrow, our challenge remains focused. In an industry as volatile and
evolutionary as ours, we face a challenge that requires creativity, ingenuity
and great performance. We have, intact, a strong foundation for continued
excellence. We know where we are going, and we know how to get there. With
teamwork, communications and a commitment to quality, we know that all things
are possible for Medical Action. We will continue to aggressively seek out
acquisition opportunities. We believe that our success has placed us in an
advantageous position by expanding whenever and wherever a profitable
opportunity arises.
In an environment charged with cost containment, we have responded with
innovative ways to build economies into the daily operations of our customers.
By helping them save money, our value to our customers shows on their bottom
line, and in turn, on ours.
We will also proceed to form partnerships with each level of the supply chain
and to increase our business. It is a long road to excellence. Yet, with a
vision that is well conceived and performed, it is a road with many rewards
along the way. We continue to meet the ever-changing needs of the industry and
our customers. The high adaptability and dedication of our employees was and is
fundamental to our past and continued future success. Medical Action is well
positioned for continued growth. Fiscal 1997 was an aggressive year for Medical
Action as we grew the business significantly while making a substantial
investment in our infrastructure in order to meet the challenges of fiscal 1998
and beyond.
Our commitment to provide superior returns to our stockholders is reflected in
every aspect of our operations. As we begin fiscal 1998, we are extremely
excited about our planned acquisition of a 205,000 square foot manufacturing
facility on approximately 32 acres in Arden, North Carolina, which will allow us
to consolidate our existing three North Carolina facilities into the new
building. This facility will provide us with extensive operating efficiencies
from plant layout to material handling, while at the same time reducing
operating expenses as we have procured advantageous financing with tax exempt
Industrial Revenue Bonds. The transaction is expected to close in early summer.
In addition, with the knowledge and understanding that our future success is
also based on developing strong management and operating personnel, we named
John J. White, Jr. as Vice President of Manufacturing, who will oversee all of
our manufacturing operations. Mr. White comes to us with extensive experience in
the medical device industry, including packaging, sterilization and regulatory
compliance. We are extremely pleased to have him as part of our management team.
The opportunities are bright for Medical Action. We thank our customers,
healthcare partners, stockholders and employees for their support of Medical
Action Industries and confidently look forward to the future.
- -------------------------------------------------------------------------------
/s/ Joseph R. Meringola
Joseph R. Meringola
Chairman of the Board
(Chief Executive Officer)
/s/ Paul D. Meringola
Paul D. Meringola
President
(Chief Operating Officer)
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3
<PAGE>
Medical Action's revenues for fiscal 1997 exceed $46,000,000. Medical 1997
Action internally developed and introduced a line of endoscopic
specialty sponges and sponge counter bags. Total assets aproach
$25,000,000. Medical Action agrees to aquire 205,000 square foot
manufacturing facility in Arden, North Carolina which allows a
consolidation of three separate facilities.
Medical Action acquires the sterilization packaging, monitoring and 1996
contamination control products business Lawson Mardon Medical
Products, Inc.
Medical Action acquires the disposable surgical products business of 1994
QuanTech, Inc., including a proprietary surgical light handle cover,
needle counting devices, instrument pouches, magnetic instrument
drapes and related products used primarily in the operating room
environment; Medical Action introduces a line of specialty sponges,
which include dissecting sponges, tonsil sponges, stick sponges and
eye spears.
Medical Action's revenues for fiscal 1993 exceed $33,000,000; Medical 1993
Action is one of the leading manufacturers of operating room towels;
Medical Action implements electronic data interchange ("EDI"), which
allows for paperless transactions, including order entry, reduces
costs and permits our partners to reduce inventory levels.
Paul D. Meringola appointed President and Director of Medical Action; 1992
the Company's New York headquarters move to 150 Motor Parkway,
Hauppauge, New York.
Medical Actions revenues for fiscal 1988 exceed $21,000,000. 1988
[LOGO]
Requiring significantly more manufacturing space, South Mountain 1987
Medical, Inc. moves its manufacturing operations into a 52,000 square
foot facility in Asheville, North Carolina; Medical Action
reincorporates in the State of Delaware.
Medical Action introduces, under the trademark ACTISORB(TM), a line of 1986
cotton absorbent operating room towels; Medical Action's common stock
commences trading on the NASDAQ "National Market System" under the
symbol MDCI.
South Mountain Medical, Inc. becomes a wholly-owned subsidiary; 1984
Medical Action's revenues for fiscal 1984 exceed $10,000,000; Medical
Action successfully completes a $3,000,000 initial public offering;
Medical Action is one of the leading manufacturers of laparotomy
sponges.
Requiring additional office and warehouse space, Medical Action moves 1983
its executive offices into a 17,800 square foot facility at 1934 New
Highway, Farmingdale, New York.
Medical Action acquires a majority interest in South Mountain Medical, 1981
Inc. a North Carolina corporation, the Company's contract
manufacturer.
Medical Action's revenues for fiscal 1980 approach $1,000,000. 1980
Joseph R. Meringola, the Company's founder, incorporates Medical 1977
Action Industries Inc. in the State of New York for the purpose of
manufacturing, marketing and distributing a variety of
surgical-related products.
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FOR TWO DECADES...
THE PARTNER
OF CHOICE
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4
<PAGE>
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Management's Discussion and Analysis of Financial Condition and Results
of Operations
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RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Net sales for the fiscal year ended March 31, 1997 increased 18% to
$46,000,000 from $38,846,000 for the fiscal year ended March 31, 1996. The
increase in net sales was primarily attributable to a full year of net sales of
the medical sterilization products acquired from Lawson Mardon Medical Products,
Inc. in January 1996, which increased $4,837,000; a $890,000 or 7% increase in
net sales of operating room towels; a $693,000 or 22% increase in net sales from
the QuanTech product line; and an increase of $465,000 or 3% in net sales of
laparotomy sponges. Net sales of operating room towels and laparotomy sponges
increased by 16% and 3% in unit sales, respectively. Management believes that
the increase in net unit sales of operating room towels, the QuanTech product
line and laparotomy sponges was primarily due to greater domestic market
penetration.
The Company presently obtains substantially all of its raw materials for
operating room towels from China. These operating room towels are designated as
a textile, for which an export visa is required. These export visas may impact
the availability and pricing of operating room towels. While the Company cannot
predict whether or not these conditions will occur during fiscal 1998, the
Company has accelerated its procurement of operating room towels from China.
Management believes that it will be able to meet the Company's requirements of
operating room towels for fiscal 1998.
Gross profit increased $1,516,000, or 19%, to $9,673,000 for the fiscal
year ended March 31, 1997 as compared to $8,157,000 for the prior fiscal year.
Gross profit as a percentage of sales for the fiscal year ended March 31, 1997
remained at 21.0% as compared to the prior fiscal year. The increase in gross
profit dollars was primarily attributable to the increase in net sales.
Selling, general and administrative expenses increased by $1,288,000 to
$7,375,000 for the fiscal year ended March 31, 1997 from $6,087,000 for the
prior fiscal year. As a percentage of net sales, selling, general and
administrative expenses increased to 16.0% for the fiscal year ended March 31,
1997 as compared to 15.7% for the fiscal year ended March 31, 1996. The increase
in selling, general and administrative expense dollars as a percentage of sales
was primarily attributable to selling expenses associated with achieving higher
net sales, the introduction of new products resulting from the recent
acquisitions, and an increase in our sales and marketing infrastructure, which
management believes will facilitate future growth.
Interest expense decreased 24% from $865,000 or 2.0% of net sales to
$655,000 or 1.4% of net sales for the fiscal years ended March 31, 1996 and
March 31, 1997, respectively. The decrease in interest expense was attributable
to a decrease in the average principal loan balances outstanding during the
fiscal year ended March 31, 1997 as compared to the fiscal year ended March 31,
1996. The decrease in principal loan balances outstanding during the year was
primarily attributable to net cash provided from operating activities during
fiscal 1997.
Net income for the fiscal year ended March 31, 1997 was $971,000, or $.11
per share (fully diluted), as compared to $711,000, or $.09 per share (fully
diluted), for the fiscal year ended March 31, 1996. The increase in net income
was attributable to the increase in net sales and gross profits and the decrease
in interest expense, which were partially offset by an increase in selling,
general and administrative expenses.
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 benefitted 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
5
<PAGE>
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.
Liquidity and Capital Resources
Current assets have increased $157,000 to $17,859,000 at March 31, 1997
from $17,702,000 at March 31, 1996. The increase was primarily attributable to a
$456,000 increase in inventory, which was partially offset by a $229,000
decrease in cash. The Company increased its inventory primarily to support the
increased sales of newly acquired products. The Company had working capital of
$10,228,000 with a current ratio of 2.34 at March 31, 1997 as compared to
working capital of $10,334,000 with a current ratio of 2.40 at March 31, 1996.
Total borrowings outstanding, exclusive of the promissory note due Lawson
Mardon, were $8,317,000 with a debt to equity ratio of .62 at March 31, 1997 as
compared to $8,769,000 with a debt to equity ratio of .71 at March 31, 1996. The
decrease in total borrowings outstanding at year-end is primarily due to
increased cash flow from operations and a reduction of the cash balance.
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, contains a 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 interst 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 $3,795,699 at March 31, 1997 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, 1997, 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
agreement, will be sufficient to meet its working capital requirements for
fiscal 1998. Management believes that it will be able to meet the anticipated
demand for operating room towels for fiscal 1998.
The Company believes that the relatively moderate rates of inflation in
1997 and 1996 have not had significant impact on sales and profitability.
6
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
MEDICAL ACTION INDUSTRIES INC.
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March 31, 1997 1996
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<S> <C> <C>
Assets
Current assets:
Cash...................................................................... $ 275,339 $ 503,927
Accounts receivable, less allowance for doubtful accounts of $112,239 at
March 31, 1997 and $110,953 at March 31, 1996........................... 6,064,518 6,010,649
Inventories .............................................................. 11,034,902 10,578,598
Prepaid expenses.......................................................... 237,270 278,400
Other current assets...................................................... 246,880 330,212
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Total current assets......................................................... 17,858,909 17,701,786
Property and equipment, at cost, less accumulated depreciation of $4,297,098
at March 31, 1997 and $3,970,656 at March 31, 1996...................... 4,023,409 3,634,476
Investment in joint ventures................................................. 495,135 581,135
Due from officers............................................................ 195,000 --
Excess of cost over net assets acquired, less accumulated amortization of
$354,696 at March 31,1997 and $217,425 at March 31, 1996.................. 2,314,848 2,452,119
Other assets................................................................. 106,251 20,820
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Total assets................................................................. $24,993,552 $24,390,336
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable........................................................... $ 1,722,842 $ 1,393,283
Accrued expenses, payroll and payroll taxes................................ 481,580 724,462
Accrued income taxes....................................................... 14,031 128,314
Current portion of capital lease obligations............................... 130,703 20,511
Notes payable to bank...................................................... 3,954,301 3,993,215
Other note payable........................................................ -- 641,845
Current portion of long-term debt.......................................... 1,327,166 465,657
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Total current liabilities.................................................. 7,630,623 7,367,287
Deferred income taxes...................................................... 386,313 361,724
Capital lease obligations, less current portion........................... 523,636 77,416
Long-term debt, less current portion....................................... 3,035,038 4,3l0,542
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11,575,610 12,116,969
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Shareholders' equity :
Common stock, 15,000,000 shares authorized, $.001 par value:
issued 8,230,289 shares at March 31, 1997 and 8,199,789
shares at March 31, 1996................................................... 8,230 8,200
Additional paid-in capital, net of deferred compensation of
$296,125 at March 31,1997 and $417,484 at March 31,1996..................... 8,178,780 8,005,582
Retained earnings........................................................... 5,230,932 4,259,585
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity................................................... 13,417,942 12,273,367
Commitments (Note 9)
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity................................... $24,993,552 $24,390,336
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
7
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
MEDICAL ACTION INDUSTRIES INC.
- -------------------------------------------------------------------------------------------------------
Year ended March 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ............................................... $ 46,000,309 $ 38,846,290 $ 35,111,326
Cost of sales ........................................... 36,327,173 30,689,411 28,829,516
- -------------------------------------------------------------------------------------------------------
Gross profit ............................................ 9,673,136 8,156,879 6,281,810
- -------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses............. 7,375,479 6,087,447 5,832,252
Interest expense, net ................................... 655,085 865,122 696,253
- -------------------------------------------------------------------------------------------------------
8,030,564 6,952,569 6,528,505
- -------------------------------------------------------------------------------------------------------
Income (loss) before income taxes ....................... 1,642,572 1,204,310 (246,695)
Income tax expense (benefit) ............................ 671,225 493,567 (63,549)
- -------------------------------------------------------------------------------------------------------
Net income (loss) ...................................... $ 971,347 $ 710,743 $ (183,146)
- -------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Primary .............................................. $ .12 $ .09 $ (.02)
Fully diluted ........................................ $ .11 $ .09 $ (.02)
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
8
<PAGE>
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
MEDICAL ACTION INDUSTRIES INC.
- --------------------------------------------------------------------------------------------------------------------------------
Total
Common Stock Additional Deferred Retained Shareholders'
Shares Amount Paid-In Capital Compensation Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 Management
Stock Bonus Plan ................ 80,000 80 199,920 (200,000)
Shares issued for Quan Tech,
Inc. acquisition ................ 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 ................ (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 Management
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
- --------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock:
Pursuant to Stock Incentive
Plan ......................... 10,000 10 23,740 (23,750)
On exercise of stock options .... 20,500 20 30,005 30,025
Amortization of deferred
compensation .................... 145,109 145,109
Net tax liability from vesting of stock
under Restricted Management
Stock Bonus Plan and exercise
of non-qualified options ........ (1,906) (1,906)
Net income ............................ 971,347 971,347
- --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 ............. 8,230,289 $ 8,230 $ 8,474,905 $ (296,125) $ 5,230,932 $13,417,942
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
9
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
MEDICAL ACTION INDUSTRIES INC.
- -------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) ................................................... $ 971,347 $ 710,743 $ (183,146)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................. 687,799 867,851 810,317
Provision for doubtful accounts ............................... 25,000 -- --
Deferred income taxes ......................................... 24,589 (52,538) (69,388)
Deferred compensation ......................................... 145,109 114,640 55,915
Loss on sale of property and equipment ........................ -- 14,324 --
Changes in operating assets and liabilities:
Accounts receivable ........................................ (78,869) 870,426 (1,255,535)
Inventories ................................................ (456,304) (1,241,479) (1,443,192)
Prepaid expenses, other current assets and other receivables 32,462 395,908 (80,612)
Recoverable income taxes ................................... -- -- 170,071
Other assets ............................................... (85,431) -- 1,017
Accounts payable ........................................... 329,559 (183,091) (16,904)
Accrued income taxes ....................................... (116,189) 214,436 10,607
Accrued expenses, payroll and payroll taxes ................ (242,882) 372,380 (133,973)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ................. 1,236,190 2,083,600 (2,134,823)
- -------------------------------------------------------------------------------------------------------------------
Investing activities
Purchase price and related acquisition costs (Note 3) ............... -- (75,871) --
Purchases of property and equipment ................................. (214,691) (50,459) (157,013)
Proceeds from sale of property, plant and equipment ................. 92,000 188,100 --
Loan to Chairman of the Board ....................................... (59,000) (60,000) --
Repayment of loan to Chairman of the Board .......................... 59,000 60,000 --
Loans to officers - net ............................................. (195,000) -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities ................. (317,691) 61,770 (157,013)
- -------------------------------------------------------------------------------------------------------------------
Financing activities
Proceeds from revolving line of credit and long-term borrowings ..... 2,707,512 3,233,803 6,593,367
Principal payments on revolving line of credit, term loan,
long-term debt and capital lease obligations ..................... (3,884,624) (5,562,440) (4,252,490)
Proceeds from exercise of employee stock options .................... 30,025 142,065 --
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities ................. (1,147,087) (2,186,572) 2,340,877
- -------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash ......................................... (228,588) (41,202) 49,041
Cash at beginning of year ........................................... 503,927 545,129 496,088
- -------------------------------------------------------------------------------------------------------------------
Cash at end of year ................................................. $ 275,339 $ 503,927 $ 545,129
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosure:
Interest paid .................................................... $ 656,841 $ 875,923 $ 809,305
- -------------------------------------------------------------------------------------------------------------------
Income taxes paid ................................................ $ 762,824 $ 336,478 $ --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS March 31, 1997
MEDICAL ACTION INDUSTRIES INC.
1. Significant Accounting Policies
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 is provided on
the straight-line method over the period of their economic or related lease
lives, whichever is less.
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 13 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 of primary earnings per share
amounted to 8,443,098, 8,247,646 and 7,842,964 for the years ended March 31,
1997, 1996 and 1995, respectively. Shares used in the computation of
fully-diluted earnings per share amounted to 8,626,221, 8,265,012 and 7,842,964
for the years ended March 31, 1997, 1996 and 1995, respectively.
Stock Compensation
In accordance with the provisions of Financial Accounting Standards Board
("FASB") Statement No. 123, "Accounting and Disclosure of Stock - Based
Compensation" ("SFAS No. 123,"), the Company continues to apply Accounting
Principles Board Opinion 25 ("APB 25") and related interpretations in accounting
for stock option and restricted stock bonus plans. Note 11 contains a summary of
the pro forma effects to reported net income and earnings per share for the
years ended March 31, 1997, and 1996 had the Company elected to recognize
compensation expense based on the fair value of the options on the date of grant
as prescribed by SFAS No. 123.
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 adopted Statement 121 in
the first quarter of fiscal 1997. Such adoption has not resulted in the
recognition of an impairment loss as indicators of impairment are not present.
2. Inventories
Inventories consist of the following:
- -----------------------------------------------------------------
March 31, 1997 1996
- -----------------------------------------------------------------
Finished goods........................ $ 4,491,193 $ 3,973,422
Raw materials......................... 6,543,709 6,605,176
Total................................. $11,034,902 $10,578,598
- -----------------------------------------------------------------
3. Acquisitions
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, a promissory note in the amount of $855,793
and $527,000 of SBW inventory. 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 ($8,852 and $1,265 as of March 31, 1997 and March
31, 1996 respectively).
On August 12, 1994, the Company acquired substantially all of the assets and
certain liabilities of Quan Tech, Inc.("Quan Tech"). Quan Tech'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 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. The acquisition has been accounted for as a purchase and the
operations of Quan Tech 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 ($345,844 and $216,160 as of March 31, 1997 and 1996 respectively).
11
<PAGE>
4. Property and Equipment
Property and equipment (including those arising from capital leases) are
summarized as follows:
- -----------------------------------------------------------------
March 31, 1997 1996
- -----------------------------------------------------------------
Building...................... $1,550,000 $1,550,000
Factory equipment............. 4,994,366 4,818,896
Furniture and fixtures........ 483,229 483,229
Leasehold improvements........ 550,259 550,259
Capital leases-equipment...... 735,833 97,063
Automobiles and trucks........ 6,820 105,685
- -----------------------------------------------------------------
8,320,507 7,605,132
Less accumulated depreciation
and amortization......... 4,297,098 3,970,656
- -----------------------------------------------------------------
$4,023,409 $3,634,476
- -----------------------------------------------------------------
5. Joint Venture Agreements
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
cost 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 ($86,000 in 1997, $85,000 in 1996 and
$84,000 in 1995.)
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
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, 1997, the
Company has received approximately $1,091,000 of surgical sponges under this
agreement. The anticipated amount of the surgical sponges to be received in
fiscal 1998 ($49,000) has been included in other current assets.
6. Related Party Transactions
At various times during fiscal 1997, the Company made loans to certain officers
which totaled $195,000. These loans, which charge no interest, are payable on
demand and are classified as long-term assets as there are presently no
repayment terms.
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.
7. Income Taxes
Income tax (benefit) expense consists of the following:
- -----------------------------------------------------------------
March 31, 1997 1996 1995
- -----------------------------------------------------------------
Current:
Federal............ $561,315 $471,278 $ 5,839
State.............. 85,321 74,827 --
Deferred.............. 24,589 (52,538) (69,388)
- -----------------------------------------------------------------
$671,225 $493,567 $(63,549)
- -----------------------------------------------------------------
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.
The following table indicates the significant elements contributing to the
difference between the statutory federal tax rate and the Company's effective
tax rate for 1997, 1996 and 1995:
- -----------------------------------------------------------------
March 31, 1997 1996 1995
- -----------------------------------------------------------------
Statutory rate........... 34.0% 34.0% (34.0)%
State taxes.............. 3.4% 4.1 (2.6)
Nondeductible expenses... 3.1% 4.0 14.9
Other.................... 0.4% (1.1) (4.1)
- -----------------------------------------------------------------
Effective tax rate....... 40.9% 41.0% (25.8)%
8. 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 2002.
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, 1997:
12
<PAGE>
- -----------------------------------------------------------------
Capital Operating
Leases Leases
- -----------------------------------------------------------------
1998................................. $184,194 $247,984
1999................................. 181,460 212,929
2000................................. 181,957 15,482
2001................................. 171,658 5,311
2002................................. 72,798 --
- -----------------------------------------------------------------
Total minimum lease payments 792,067 $481,706
Amounts representing interest 137,728
- -----------------------------------------------------------------
Present value of net minimum
lease payments ($130,703 of
which is current)................. $654,339
- -----------------------------------------------------------------
Equipment acquired under capital leases was $638,770 and $72,940 in fiscal 1997
and 1996 respectively. Rental expense under operating leases was $566,095,
$548,624 and $445,819 for the fiscal years ended March 31, 1997, 1996 and 1995
respectively.
9. Long Term Debt
- -----------------------------------------------------------------
March 31, 1997 1996
- -----------------------------------------------------------------
Revolving credit agreement(a)...... $2,250,000 $2,200,000
Equipment and term notes
payable (b), (c), (d) and (e)... 1,263,373 1,578,773
Mortgage notes payable (f)......... 848,831 997,426
- -----------------------------------------------------------------
4,362,204 4,776,199
Less current portion............... 1,327,166 465,657
- -----------------------------------------------------------------
$3,035,038 $4,310,542
- -----------------------------------------------------------------
(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 (8.50% at March
31, 1997) plus 1/4% 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. Bankers acceptances at March 31, 1997
and 1996 in the amount of $3,954,301 and $3,993,215, respectively, have been
classified as notes payable. The weighted average interest rate on such short
borrowings outstanding was 7.36% and 7.23% at March 31, 1997 and 1996,
repectively. 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. 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, 1997.
(b) On August 12, 1994, in connection with the Quan Tech 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. This loan was fully repaid during the year ended March 31, 1997.
(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 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% and is
collateralized by the manufacturing facility which has a net book value of
$1,298,000 at March 31, 1997. It is anticipated that this mortgage will be fully
amortized during the fiscal year ending March 31, 2002. See Note 14.
Maturities of long term debt are as follows at March 31, 1997:
- -------------------------------------------
1998........................... $1,327,166
1999........................... 2,528,713
2000........................... 194,995
2001........................... 212,758
2002........................... 98,572
- -------------------------------------------
$4,362,204
- -------------------------------------------
The carrying amounts of the Company's long term debt approximate their fair
value at March 31, 1997.
10. 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 was payable
in four (4) equal monthly installments commencing on March 1, 1996, and was
subject to certain reductions based on the Company's collection of the accounts
receivable purchased. The note bore interest at the prime lending rate. This
note was fully repaid during the year ended March 31, 1997.
13
<PAGE>
11. Shareholders' Equity and Stock Plans
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. During fiscal 1997, all remaining
outstanding options expired. The number of shares exercisable at March 31, 1997,
1996 and 1995 were 0, 147,500 and 147,500, 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 1,650,000 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, 1997 there were 264,000 shares available for granting of future
options. The number of shares exercisable at March 31, 1997, 1996 and 1995 were
456,000, 349,500 and 407,750, respectively.
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, 1997, 489,563 shares had been issued, of
which 372,938 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
non-qualified 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. Grants outstanding at March 31,
1997 vest in two equal installments on the first and second anniversary of the
date of grant. Future grants may have different vesting schedules. At March 31,
1997, there were 15,000 shares available for future grants. At March 31, 1997,
10,000 shares of restricted
Option activity under the option plans during the three years ended
March 31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Incentive Option Plan Non-Qualified Option Plan 1994 Stock Incentive Plan Weighted Average
----------------------- ------------------------- -------------------------- ----------------
Number of Option Price Number of Option Price Number of Option Price Option Price
Shares Per Share Shares Per Share Shares Per Share Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994.. 162,670 $1.875-$2.50 737,750 $.60-$4.125 -- -- 2.20
Granted................... -- -- 13,000 $1.31-$2.50 -- -- 1.58
Exercised................. -- -- -- -- -- -- --
Cancelled................. (15,170) $1.875 (84,250) $.60-$4.125 -- -- 2.10
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 147,500 $2.50 666,500 $.60-$4.125 -- -- 2.20
- -----------------------------------------------------------------------------------------------------------------------------------
Granted................... -- -- 268,000 $.97-$2.14 270,000 $ .97-$2.19 1.50
Exercised................. -- -- (207,500) $.60-$.875 -- -- .77
Cancelled................. -- -- (108,500) $.97-$3.25 -- -- 2.49
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 147,500 $2.50 6l8,500 $.97-$4.125 270,000 $ .97-$2.19 2.09
- -----------------------------------------------------------------------------------------------------------------------------------
Granted................... -- -- 303,250 $1.69-$2.38 205,000 $1.88-$2.38 1.88
Exercised................. -- -- (20,500) $.97-$1.75 -- -- 1.46
Cancelled................. (147,500) $2.50 (20,500) $.97-$2.50 -- -- 1.71
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 -- -- 880,750 $.97-$2.50 475,000 $ .97-$2.38 1.71
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
stock are outstanding, none of which have vested. Furthermore, the number of
non-qualified options exercisable at March 31, 1997, 1996, and 1995 were
135,000, 0 and 0 respectively. No incentive options have been issued under this
plan.
Pursuant to an employment agreement expiring in August 1998, 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 Quan Tech, 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.
In accordance with the provisions of SFAS No. 123, the Company has elected to
apply APB 25 and related interpretations in accounting for its stock option and
restricted stock bonus plans because, as discussed below, the alternative fair
value accounting provided for under SFAS No. 123 requires use of option
valuation models that were not developed for use in valuing such stock options.
For the years ended March 31, 1997, 1996, and 1995, all stock options were
granted with an exercise price equal to the fair market value on their date of
grant. Therefore, under the provisions of APB 25, no compensation expense has
been recognized under the Company's stock option plans. If the Company had
elected to recognize compensation expense based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated in the table
below:
- ---------------------------------------------------------
1997 1996
- ---------------------------------------------------------
Net income - as reported 971,347 710,743
Net income - pro forma 791,826 660,085
Earnings per share - as reported:
Primary .12 .09
Fully diluted .11 .09
Earnings per share - pro forma:
Primary .09 .08
Fully diluted .09 .08
- ---------------------------------------------------------
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
- ---------------------------------------------------------
1997 1996
- ---------------------------------------------------------
Expected dividend yield 0.0% 0.0%
Expected stock price volatility .625 .629
Risk-free interest rate 6.25% 5.66%
Expected life of options 4 years 4 years
- ---------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The weighted average fair value of options granted is $1.02 in fiscal 1997 and
$1.00 in fiscal 1996. The weighted-average remaining contractual life of all
options outstanding at March 31, 1997 is 3.3 years. The weighted-average
exercise price of all options exercisable at March 31, 1997 is $1.65. The pro
forma effect on net income in fiscal 1997 and 1996 is not representative of the
pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
fiscal 1996.
12. Retirement Plan
Effective April 1, 1988, the Company adopted a retirement plan for all of its
employees pursuant to section 401(k) of the Internal 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 $41,276
in 1997, $10,140 in 1996 and $27,262 in 1995.
13. 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 impact the availability and pricing of operating room towels. While
the Company cannot predict whether or not these conditions will continue during
fiscal 1998, the Company has accelerated its procurement of operating room
towels from China. Management believes that it will be able to meet the
Company's requirements of operating room towels for fiscal 1998.
(c) Sales to Owens and Minor Inc., Allegiance Healthcare Corp. and
General Medical Corporation accounted for approximately 23%, 18% and 10% of net
sales, respectively for the fiscal year ended March 31, 1997, and 23%, 21% and
10% for the fiscal year ended March 31, 1996. Sales to Allegiance Healthcare
Corp. and Owens and Minor, Inc. each accounted for approximately 19% of net
sales for the fiscal year ended March 31, 1995.
(d) Product development costs charged to expense were $315,000, $291,000
and $211,000 for the years ended March 31, 1997, 1996 and 1995, respectively.
14. Subsequent Event
Subsequent to March 31, 1997, the Company entered into an agreement to purchase
a building in Arden, N.C. for $2,900,000 to function as its new manufacturing
facility. The Company is in the process of financing the purchase price with an
Industrial Revenue Bond. The terms of such financing have not been finalized.
Subsequent to March 31, 1997 the Company also signed an agreement for the sale
of its existing manufacturing facility in Asheville, N.C. (see Note 9 (f)). The
selling price of $1,425,000 is expected to be paid by the scheduled closing date
of August 15, 1997. Such proceeds will be used first to pay the remaining
mortgage on the existing manufacturing facility, then to pay down other debt
balances.
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
judgements 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.
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Medical Action Industries Inc.
We have audited the accompanying balance sheets of Medical Action Industries
Inc. as of March 31, 1997 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1997. 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 financial position of Medical Action Industries Inc.
at March 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Joseph R. Meringola
Joseph R. Meringola, Chairman of the Board
(Chief Executive Officer)
/s/ Paul D. Meringola
Paul D. Meringola, President
(Chief Operating Officer)
/s/ Ernst & Young LLP
Melville, N.Y.
May 23, 1997
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. Philip F. Corso
Assistant Clinical Professor of
Surgery - Yale University School
of Medicine; Senior Attending and
Emeritus 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, President of the
Medical Staff of St. Francis Hospital
in Roslyn, New York
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 F. 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
Eric Liu
Director of China Operations
Philip R. Meringola
Director of Information
Systems
John Nie
National Sales Manager
John J. White, Jr.
Vice President-Manufacturing
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 National Market tier of the NASDAQ
Stock Market under the symbol MDCI. As of June 1, 1997, 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 the National Market tier
of the NASDAQ Stock Market:
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, 1997, 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 will be held on Wednesday,
August 13, 1997 at the offices of Medical Action Industries Inc., 150 Motor
Parkway, lower level, Hauppauge, 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.
- -------------------------------------------------------------------
Fiscal 1997 Fiscal 1996
- -------------------------------------------------------------------
High Low High Low
First Quarter 2-1/2 1-25/32 1-15/16 1-7/8
Second Quarter 2-5/16 1-5/8 2-1/2 1-1/4
Third Quarter 2-5/32 1-5/16 2-1/16 1-5/16
Fourth Quarter 3-3/4 1-9/16 2-5/8 1-7/8
- -------------------------------------------------------------------
17
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[LOGO]
Medical Action Industries Inc.
Executive Offices:
150 Motor Parkway
Suite 205
Hauppauge, NY 11788
(516) 231-4600
