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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission File No. 0-13251
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2421849
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
150 Motor Parkway, Hauppauge, New York 11788
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (516)231-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
The aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant as of June 5, 1998 was approximately
$28,500,000. As of June 5, 1998, registrant had outstanding 8,442,039
shares of Common Stock.
Parts of the following documents are incorporated by reference to Parts I,
II, III and IV of this Form 10-K Report: (1) Proxy Statement for
registrant's 1998 Annual Meeting of Stockholders and (2) registrant's
Annual Report to Stockholders for the fiscal year ended March 31, 1998.
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PART I
ITEM ONE - BUSINESS
Medical Action Industries Inc. (the "Company" or "Medical Action")
develops, manufactures, markets and distributes a variety of disposable
surgical related products. Medical Action is a leading manufacturer and
distributor of sterile disposable laparotomy sponges and operating room towels
in the United States. Laparotomy sponges and operating room towels are produced
from cotton and used for a multitude of purposes during operating room
procedures. To compliment these products, Medical Action has developed several
product lines, including gauze sponges, gauze fluffs, dry burn dressings and
non-adherent gauze dressings. Gauze sponges and/or fluffs are used in all
healthcare facilities including hospitals, health maintenance organizations,
dental facilities and veterinary centers. Gauze fluffs are pre-folded gauze
pads used for compression and absorption of blood and other fluids. Dry burn
dressings are composed of multiple layers of folded gauze that are typically
customized for hospitals as to size, weave, folds, stitching and packaging.
Non-adherent dressings reduce sticking and protect skin grafts during dressing
changes, thereby alleviating trauma and pain to the wound site. The Company has
also introduced a line of specialty sponges, including eye spears, dissecting,
stick and tonsil sponges, all of which are used in a variety of surgical
procedures.
In August 1994, the Company acquired the disposable surgical products
business of QuanTech, Inc. The acquired QuanTech products include a proprietary
surgical light handle cover, uniquely designed and patented, which is used as a
sterile barrier on surgical light handles in the operating room. QuanTech also
produces and markets needle counters, instrument pouches, magnetic instrument
drapes, and related products used primarily in the operating room environment.
In January 1996, the Company acquired certain assets relating to the
sterilization packaging, monitoring and contamination control products business
of Lawson Mardon Medical Products, Inc. ("Lawson Mardon" or "SBW"). The primary
products acquired from Lawson Mardon include sterility packaging, a line of
sterilization indicators and integrators and such ancillary products as
infectious waste bags, laboratory specimen bags and sterility maintenance
covers. These products are used in hospital central supply, operating rooms and
in physicians'
offices.
In October 1997, the Company acquired substantially all of the assets
relating to the specialty packaging business of Dayhill Corporation
("Dayhill"). The acquired Dayhill products principally consist of collection
systems for the containment and transport of biohazardous waste, including
biohazard bags, autoclave bags, laboratory transport bags, zip lock bags and
sponge counting bags.
In January 1998, the Company acquired the sponge counter product lines
of Sage Products, Inc., which included a uniquely designed and patented
surgical sponge counting system, SAFE-T-Count(Trademark), as well as a counting
system known as Pocket Count(Trademark).
Management's growth strategy is to focus its resources on entering new
markets for its existing product lines, including alternate care, physician,
veterinary and dental markets; accelerate the internal development of new
products for its existing markets and pursuit of acquisitions which include
products that complement existing product lines for utilization of the
Company's extensive sales and distribution channels; the introduction of its
products into the international marketplace; and to increase productivity by
maximizing the utilization of its existing facilities.
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Through its existing direct sales force, manufacturers'
representatives and internal sales department, the Company's products are sold
throughout the United States and certain international markets, and is
expanding its end-user base to include physician, dental and veterinary
offices. Medical Action has entered into preferred vendor agreements with
national distributors, as well as sole source and/or committed contacts with
nearly every major group purchasing alliance. The Company intends to utilize
these sales channels to expand its product lines to include both surgical and
non-surgical products.
The products presently manufactured and/or marketed by the
Company include:
Disposable Laparotomy Sponges - Laparotomy sponges are designed
primarily for use during surgical procedures in hospitals and health
facilities. They are single use (disposable) and made of gauze and sold in
varying sizes and utilized for a multitude of purposes. Laparotomy sponges
cover exposed internal organs, isolating them from the part of the body being
operated upon. They also absorb blood and act as a buffer between medical
instruments and the skin, thereby reducing trauma to skin tissue caused by the
medical instrument. Laparotomy sponges are sold in sterile packaging or as a
non-sterile component to be used with other health care companies' products,
primarily surgical pre-packaged procedure trays. The Company's laparotomy
sponges contain an x-ray detectable element and loop handle in order to
facilitate easy counting and identification in the operating room. For the
fiscal years ended March 31, 1998, 1997 and 1996, laparotomy sponges accounted
for 36%, 41% and 48%, respectively, of the Company's total sales.
Absorbent Operating Room Towels - The Company introduced
ACTI-SORB(Trademark), a line of cotton absorbent operating room towels, which
are used during surgery for drying hands, rolled up for propping instruments, on
back tables and mayo stands for absorbing fluids, around the incision site for
absorbing blood and to allow the surgeon to clip tubing and instruments close to
the surgical site during the surgical procedure. Operating room towels are sold
in sterile packaging for single (disposable) use and as a non-sterile component
to be used with other health care companies' products, primarily surgical
pre-packaged procedure trays. For the fiscal years ended March 31, 1998, 1997
and 1996, operating room towels accounted for 34%, 29% and 32%, respectively, of
the Company's total sales.
Gauze Sponges - The Company developed a line of gauze sponges and
gauze fluffs. The Company believes that its brand recognition in the laparotomy
sponge field will pave the way for its entrance into the gauze sponge market.
Gauze sponges are used in the operating room as well as throughout the
hospital. They are also used extensively throughout the alternate care market,
including physicians' offices, health clinics, dentists' offices and in
veterinary practices. The Company also introduced gauze fluffs which are
pre-folded gauze sponges used for compression and absorption of blood and other
fluids.
Burn Dressings - As an extension of its product line, the Company
introduced dry burn and non-adherent gauze dressings. The dry burn dressing is
composed of multiple layers of folded gauze that are typically customized for
individual hospitals as to size, weave, folds, and stitching. The non-adherent
dressings reduce sticking and skin removal during dressing changes, thereby
alleviating trauma and pain to the wound site.
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Specialty Sponges - The Company's line of specialty sponges is an
extension to its laparotomy sponges. The Company's specialty sponges are used
invasively in a variety of surgical procedures and are manufactured for a
multitude of purposes and classified as follows:
(a) Dissecting Sponges - primarily utilized in surgical procedures to
separate tissue as opposed to cutting, thereby reducing bleeding and trauma to
the organ. The Company's dissecting sponges are produced in three specific
types of sponges.
(i) Peanut Sponge - a small, firm gauze sponge for dissecting
and delicate sponging. The peanut sponge is carefully folded
to encompass an x-ray element and is manufactured to allow
the surgeon to adjust firmness for specific application.
(ii) Kittner Dissector - a very firm, blunt dissector made of
ravel free abdominal tape, which is hand stitched to firmly
lock in an x-ray element and to ensure the sponge integrity.
(iii) Cherry Dissector - a round, soft dissector sponge
constructed from cotton for blunt dissection. A small hole
facilitates easy grasping with hemostatic forceps.
(b) Tonsil Sponges - a round, fiber filled gauze constructed with a
strong abdominal tape string sewn into the sponge to anchor the sponge
when used in hard to retrieve places.
(c) Stick Sponges - a round, fiber filled gauze sponge used for deep
sponging or prepping.
(d) Eye Spears - a cellulose fiber tip utilized during eye surgery,
constructed with a memory-free plastic handle in order to bend to any
angle the surgeon desires. The eye spear absorbs 10 times its weight
in fluid.
Endoscopic Specialty Sponges - As an extension of its line of
specialty sponges, the Company introduced endoscopic specialty sponges.
Endoscopic specialty sponges are used in less invasive surgical procedures. The
Company's endoscopic specialty sponges, all of which are dissecting sponges,
are made of 100% cotton affixed to a fiberglass stick and classified as
follows:
(a) Endoscopic Kittner - a very firm, blunt dissecting sponge made of
a ravel-free abdominal tape, which is hand stitched to lock in an
x-ray element and securely affixed to a fiberglass stick with
orthopedic glue to ensure the sponge integrity.
(b) Endoscopic Cherry/Bullet - the names refer to the shape of the
sponges. Both are soft, blunt dissecting sponges made of spun cotton,
securely affixed to a fiberglass stick with orthopedic glue to ensure
the sponge integrity.
Disposable Surgical Light Handle Covers - Light Shields(Trademark) - A
patented design assures a secure fit and acts as a sterile barrier on surgical
light handles in the operating room. Light Shields(Trademark) are manufactured
of a heavy gauge flexible plastic for the optimum assurance of a sterile
barrier.
Needle Counters - Red plastic boxes manufactured from medical grade
materials designed to resist breakage and punctures. They are produced with a
variety of designs, including surgical grade magnets in order to facilitate
sharps disposal, foam blocks and foam strips with varying count capacity and
designs.
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Surgical Marking Pens - Specifically designed so that the pen barrel
fits comfortably in the surgeon's hand and is made with gentian violet color
ink. All pen barrels are embossed with a 5 cm. ruler and may also include a 15
cm. coated ruler and blank labels.
Convenience Kits - The Company offers its customers the ability to
purchase multiple products packaged with its needle counters. The Company has
the flexibility to package many different kits to individualize a hospital's
requirements.
Medical Pouches - Used to house instruments during the sterilization
process and maintain sterility of the instrument until it is needed. The
pouches are primarily used in hospital central supply, operating rooms and in
physicians' and dentists' offices as well as in any environment where sterile
instruments are needed. There are three different styles of pouches available -
self seal, heat seal and rolls. The self seal is already sealed on three sides
and includes a peel back adhesive strip on the bottom of the package, which
when folded over will seal the package. The second type is heat seal, which is
also sealed on three sides but needs a heat sealer to seal the fourth side. The
Company also markets a roll product, where the user could pull as long a pouch
as needed. This requires both ends to be sealed.
Infectious Waste Bags - Used to collect, store and transport
biohazardous and infectious waste. The bags come in a variety of sizes, and are
red with the international biohazard symbol clearly marked on the bag. The bags
are made of high quality resins with reinforced seals for puncture resistance
and to reduce the risk of leakage.
Laboratory Specimen Transport Bags - Used to collect, transport or
hold samples from patients for examination or analytical procedures. The bags
feature a separate pouch which can be used for accompanying paperwork. The
pouch has a special seal that will ensure that the paperwork does not get
contaminated or contaminate the lab specimen.
Sterility Maintenance Covers - Used to cover sterile products and
protect against dust, moisture or any other contaminants that may render the
product non-sterile. They are used to package, store, and transport while
maintaining a dust-free environment for sterile packs. Sterility maintenance
covers come in a variety of sizes and are self seal like the sterilization
pouches. Sterility maintenance covers are clear so that you can view the
contents, are strong for protection, and tear in a linear fashion for easy
access to the product.
Sponge Counter Bags - A counting system, known as Pocket
Count(Trademark), used in the operating room to count laparotomy sponges and
gauze sponges after use. They are clear faced opaque backed plastic bags with
five large pockets that extend vertically down. Each pocket is tacked in the
center creating two compartments. The tack can be separated to create one large
pocket. The bag can hold ten gauze sponges. When the tacks are separated, the
bag will hold one large laparotomy sponge in each of its five pockets. The bag
acts as a fluid receptacle as well as a visual count of the sponges. The Company
also recently acquired a uniquely designed and patents sponge counting system
known as SAFE-T-Count(Trademark).
Autoclavable Bags - Bags used for autoclaving and sterilizing
infectious waste.
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Sterilization Monitoring Products - These are printed paper and
chemical devices used to measure certain necessary parameters within a
sterilization cycle.
Indicators: measure presence of ETO or steam and temperature
Integrators: a new technology that gives a better assurance than
traditional indicators that the proper parameters of
sterilization were fulfilled, including time,
temperature and moisture.
These products are used inside the packaged products and pouches throughout the
hospital, clinic and doctor's office environment whenever sterilization takes
place.
Trademarks and Patents
The Company owns several trademarks. While it considers that in the
aggregate the trademarks are important in the operation of its business, it
does not consider that any of its trademarks, or any group of them, are of such
importance that termination would materially affect its business.
The Company has a United States Patent (No. 4,976,299) for its surgical
light handle cover which expires in 2007 and a United States Patent (No.
5,186,322) for its Safe-T-Count(Trademark) sponge counting system which expires
in 2010. Although there is no assurance that other companies will not be
successful in developing similar products without violating the rights of the
Company, management does not believe that the invalidation of any patents owned
by the Company would have a material adverse effect on it or its business
prospects. While the protection of patents is important to the Company's
business, management does not believe any one patent is essential to the success
of the Company.
Competition
There are many companies, both public and private, engaged in the
development and marketing of disposable sterile and non-sterile surgical
supplies, including laparotomy sponges. The Company is subject to various
levels of competition based upon performance, quality and pricing. The
Company's major competitors include large manufacturers, which have greater
financial resources than the Company. The competitors differ based upon the
products being sold. In the sale of sterile laparotomy sponges, where Kendall
Healthcare Products Company and Medline Industries, Inc. are competitors,
Medical Action's sales represent a significant share of the domestic market. In
May 1997, the Company entered into a three-year supply agreement with
Allegiance Healthcare Corporation in which the Company's disposable sterile
laparotomy sponges and disposable sterile operating room towels were designated
as their "Best Value". The Company's primary competitors in the sale of sterile
operating room towels, in which the Company is also the leading supplier in the
domestic market, are Medline Industries, Inc. and DeRoyal, Inc. In the sale of
medical pouches to the hospital market, where the Company is one of the leading
suppliers, the Company's primary competitors include Tower Medical, an indirect
wholly-owned subsidiary of Rexam, PLC. In the sale of QuanTech products, where
the Company's portion of the market is relatively insignificant, the Company's
primary competitor is Devon Industries, Inc., a wholly-owned subsidiary of
Graphic Controls Corporation.
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Effects of Health Care Reform
Proposed health care legislation, if enacted, could contain provisions
intended to reform the availability, delivery and financing of health care in
the United States. Such proposed legislative packages mandate universal
coverage for all legal U.S. residents and control over health care costs. While
the Company cannot predict whether any health care reform legislation will be
approved or what effect, if any, that such health care reform legislation will
have on the Company or its operations, the Company believes that based on the
Company's understanding of current proposals, health care legislation may have
some beneficial effects on its business by increasing the availability of
health care.
Regulation
The manufacture and marketing of medical devices are regulated under
the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act
as administered by the Food and Drug Administration ("FDA"). The FDA considers
the Company's current products to be medical devices. The FDA has the authority
to determine the safety and effectiveness of all new medical devices introduced
into interstate commerce and to grant approval to applications to market such
products on a national basis.
If a new product is substantially equivalent (such term being used on
safety and intended use equivalence rather than indicating a similarity in
technology) to approved products that are commercially available, a "510(K)"
pre-market notification to the FDA is required before the product may be
commercially marketed. The FDA has ninety (90) days to respond to a pre-market
notification and, after satisfaction of all FDA comments, the Company can
market the product in the United States. All of the Company's products have
been approved to market under 510(K) notifications.
Compliance with current Good Manufacturing Practices ("GMP")
regulations is necessary to receive FDA approval to market new products and to
continue to market current products. The Company's manufacturing, quality
control and quality assurance procedures and documentation are inspected and
evaluated periodically by the FDA.
Marketing and Distribution
The Company's products are presently marketed and sold throughout the
United States through a network of direct sales personnel and manufacturers'
representatives. There are approximately 13 manufacturers' representatives and
17 direct sales personnel throughout the United States engaged in the sales and
marketing of the Company's products. Sales are primarily made to distributors,
who maintain sufficient inventory to service customer requirements. The
Company's distribution network is comprised of hospital distributors, alternate
care distributors, physician distributors, veterinary distributors, dental
distributors and industrial safety distributors covering the entire United
States and Canadian marketplace. The Company's products are typically purchased
pursuant to purchase orders or supply agreements in which the purchaser
specifies whether such products are to be supplied through a distributor or
directly by the Company.
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Management believes that the continuing pressure to utilize low-cost,
disposable medical products has significantly expanded the use of custom
procedure trays, which contain the necessary items designed for use in specific
procedures by surgical teams. Many of the custom tray suppliers are vertically
integrating the packaging process by buying bulk, non-sterile operating room
towels, laparotomy sponges and other products manufactured by the Company to
place in these custom trays. The trays are then sterilized, saving valuable
nursing time and the costs associated with individual product packaging.
In addition to private and public hospitals and health facilities,
customers for the Company's products include group purchasing organizations and
investor-owned hospital chains. With the emergence of these cooperative buying
groups and chains as major purchasers of medical/surgical products, a
significant portion of the Company's sales are dependent upon its ability to
provide its products throughout a wide geographical area and to service
substantially all members of the group or chain. The Company's present
distributor-oriented marketing network has enabled it to become a selected
source for many of the cooperative buying groups and chains. The Company
records sales upon the shipment of inventory to the distributor, at which time
title passes to the distributor. Pricing to its ultimate customer under these
supply agreements is usually established for the contract period which will
typically be from one to three years. The Company views its ultimate customers
as the medical professionals who use its products, rather than the
distributors.
No individual customer or affiliated group of customer accounts accounted for
more than 10% of the Company's net sales in any of the past three fiscal years.
Nevertheless, the Company estimates that in fiscal 1998, 1997 and 1996 a
substantial portion of its products were sold to Owens & Minor, Inc.,
Allegiance Healthcare Corporation and McKesson General Medical, diversified
distribution companies (the "Distributors"). Although the Distributors may be
deemed in a technical sense to be major purchasers of the Company's products,
the Distributors typically serve as a distributor under a purchase order or
supply agreement between the customer and the Company and does not purchase for
its own account. The Company, therefore, does not believe it is appropriate to
categorize the Distributors as actual customers.
The Company believes it has established an efficient system for
marketing its products throughout the United States, and intends to utilize
these existing sales methods and channels to market new products as they are
developed or acquired.
Research and Development
Product development costs charged to income were $364,000, $315,000
and $291,000 for the fiscal years ended March 31, 1998, 1997 and 1996,
respectively.
Employees
As of June 1, 1998, the Company had 200 full-time employees with 150
in manufacturing and distribution, 30 in marketing and sales, and 20 in
administration. None of the Company's employees are represented by a labor
union. The Company believes that its employee relations are satisfactory.
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Raw Materials
The principal raw materials used by the Company are a four-ply mesh
gauze laparotomy sponge and cotton huck towel. Other materials and supplies
used by the Company include gauze, gauze sponges, injection molded and
thermoformed plastics, foam, medical grade magnets and a variety of packaging
material. The Company presently purchases its principal cotton raw materials
primarily from the Peoples Republic of China. The Company is currently
exploring alternate sources of supply for those raw materials. The Company's
operating room towels have been classified as a non-medical device by the U.S.
Department of Customs, and therefore, are subject to import quota restrictions
which could limit the Company's future ability to bring them into the country.
Backlog
The Company does not believe that its backlog figures are necessarily
indicative of its business since most hospitals and health related facilities
order their products on a continuous basis and not pursuant to any contractual
arrangements. Since typical shipment times range from two to five days, the
Company must maintain sufficient inventories of all products at all times.
Manufacturing
The Company currently purchases its laparotomy sponges, burn dressings and
operating room towels from the Peoples Republic of China, including two joint
venture facilities. During the past few years, the Company also purchased
certain of these products, to a lesser extent, from a number of different
countries, including Mexico and the Dominican Republic. These joint ventures
were entered into in fiscal 1989 and 1990. Prior to the formation of these joint
ventures, the Company purchased its laparotomy sponges and operating room
towels from these factories. The joint venture factories are located in
Wujiang and Lin Hai, which are rural areas of China. After these products are
manufactured, they are shipped to the Company's domestic manufacturing
facilities located in Arden, North Carolina, where they are packaged.
The Company's QuanTech products and medical pouches are predominantly
manufactured and/or assembled in the Company's Arden, North Carolina facility.
Some of the medical and surgical specialty products sold by the Company are
purchased from other manufacturers, which the Company believes are readily
available from a variety of manufacturers and suppliers.
ITEM TWO - PROPERTIES
The Company occupies approximately 19,069 square feet of general
office and warehouse space at its facilities in New York and California under
real estate leases expiring through fiscal 2001, with aggregate minimum annual
rental commitments of approximately $243,552. The Company also owns a 205,000
square foot manufacturing, warehouse and distribution facility located on
approximately 32 acres in Arden, North Carolina. Management believes that the
Company's facilities are adequate to meet its current needs and should continue
to be adequate for the foreseeable future. Set forth below is a summary of the
facilities owned or leased by the Company.
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Location Primary Use Square Feet
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Arden, North Carolina Manufacturing/
Warehouse/Distribution 205,000 (a)
Hauppauge, New York Executive Offices 7,400 (b)
Syosset, New York Warehouse 3,669 (c)
Santa Ana, California Warehouse 8,000 (d)
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(a) The principal manufacturing, distribution and warehouse facility of the
Company is located on premises which the Company owns in Arden, North
Carolina. An Industrial Revenue Bond in the amount of $5,500,000 was
outstanding as of March 31, 1998, which was used to acquire and renovate the
facility and acquired certain manufacturing equipment.
(b) Premises are leased through February 28, 2001 at a current annual rental of
$173,709, subject to earlier termination by the Company.
(c) Premises are leased through September 30, 1999 at an annual rental of
$25,683.
(d) Premises are leased through January 14, 2000 at an annual rental of $44,160
ITEM THREE - LEGAL PROCEEDINGS
The Company is a party to several lawsuits arising out of the conduct
of its of business in the ordinary course, including claims related to product
liability and the sale and distribution of its products, which management
believes are covered by insurance. While the results of such lawsuits cannot be
predicted with certainty, management does not expect that the ultimate
liabilities, if any, will have a material adverse effect on the financial
position or results of operations of the Company.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
PART II
ITEM FIVE - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is set forth in registrant's
1998 Annual Report to Stockholders under the captions "Selected Financial Data"
and "Stock Trading", which information is hereby incorporated herein by
reference.
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ITEM SIX - SELECTED FINANCIAL DATA
The information required by this Item is set forth in registrant's
1998 Annual Report to Stockholders contained under the caption "Selected
Financial Data", which information is hereby incorporated herein by reference.
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is set forth in
registrant's 1998 Annual Report to Stockholders contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which information is hereby incorporated herein by reference.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the foregoing "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in
this Report constitute forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. Statements indicating the Company
"plans", "expects", "estimates" or "believes" are forward-looking statements
that involve known and unknown risks, including the Company's future economic
performance and financial results. The forward-looking statements relate to (i)
expansion of the Company's market share, (ii) the Company's growth into new
markets, (iii) internal development of new products and product lines, (iv)
procurement of export visas for operating room towels from China, which may
impact their availability and pricing, and (v) retention of the Company's
earnings for use in the operation and expansion of its business.
Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include,
but are not limited to, the effect of economic and business conditions, the
impact of consolidation throughout the healthcare supply chain, the impact of
healthcare reform, opportunities for acquisitions, the Company's ability to
effectively integrate acquired companies, the ability of the Company to
maintain its gross profit margins, the ability to obtain additional financing
to expand the Company's business, the ability to successfully compete with the
Company's competitors that have greater financial resources, the availability
and possible increases in raw material prices for operating room towels, the
impact of current or pending legislation and regulation, as well as the risks
described from time to time in the Company's filings with the Securities and
Exchange Commission, which include its Annual Report on Form 10-K and Quarterly
Reports on From 10-Q.
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The forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, express or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and that in light of the
significant uncertainties inherent in forward-looking statements, the inclusion
of such statements should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
The Company undertakes no obligation to update publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in registrant's 1998
Annual Report to Stockholders under the captions "Reports of Independent
Auditors", "Balance Sheets", "Statements of Earnings", "Statement of
Shareholders' Equity", "Statements of Cash Flows" and "Notes to Financial
Statements", which information is hereby incorporated herein by reference.
ITEM NINE - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In January 1998, Ernst & Young LLP was dismissed as the Company's
independent auditors and replaced by Grant Thornton LLP, independent certified
public accountants. The dismissal of Ernst & Young was approved by the
Company's Board of Directors. Ernst & Young's reports during the two most
recent fiscal years of the Company did not contain any adverse opinion or a
disclaimer of opinion, nor were they qualified or modified in any way. During
such periods and for the subsequent period until the date of their dismissal,
there was no disagreement with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused them to make reference to the subject matter of the
disagreement in connection with their report.
PART III
The information required by Part III is incorporated by reference to
the Company's definitive proxy statement in connection with its Annual Meeting
of Stockholders scheduled to be held in August 1998, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended March 31, 1998.
12
<PAGE>
PART IV
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) and (2) List of Financial Statements and Financial Statement Schedules
The following financial statements of Medical Action Industries Inc.,
included in the annual report of the Company to its stockholders for the year
ended March 31, 1998, are incorporated by reference in Item 8:
Balance Sheets at March 31, 1998 and 1997
Statements of Earnings
for the Years Ended March 31, 1998, 1997 and 1996
Statement of Shareholders'
Equity for the Years Ended March 31, 1998, 1997 and 1996
Statements of Cash Flows
for the Years Ended March 31, 1998, 1997 and 1996
Notes to Financial Statements
The following financial statement schedule of Medical Action
Industries Inc. and subsidiary is included in Item 14(d):
II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits:
Exhibit No.
2.1 Agreement and Plan of Reorganization dated as of August 12,
1994 among Registrant, QuanTech Acquisition Corp. and
QuanTech, Inc. (Exhibit 2.1 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995).
13
<PAGE>
2.2 Purchase Agreement dated as of January 30, 1996 among
Registrant, SBW Acquisition Corp., Lawson Mardon Medical
Products, Inc. and Lawson Mardon Medical Products, a trading
division of Lawson Mardon Packaging UK Ltd. (Exhibit 2 to the
Company's Current Report on Form 8-K dated February 6, 1996).
3.1 Certificate of Incorporation, as amended (Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1994).
3.2 By-Laws, as amended (Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988).
10.1 1996 Non-Employee Director Stock Option Plan (Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the year ended
March 31, 1997).
10.2 Restricted Management Stock Bonus Plan, as amended (Exhibit
10(b) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988).
10.3 1989 Non-Qualified Stock Option Plan, as amended (Exhibit
10.4 to the Company's Annual Report on Form 10-K for the year
ended March 31, 1990).
10.4 1994 Stock Incentive Plan (Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended March 31,
1996).
10.5 Employment Agreement dated as of February 1, 1993 between the
Registrant and Paul D. Meringola (Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1993).
10.6 Modification Agreement dated as of February 5, 1996 between
the Registrant and Paul D. Meringola (Exhibit 10 to the
Company's Current Report on Form 8-K dated February 7, 1996).
10.7 Modification Agreement dated as of May 28, 1997 between the
Registrant and Paul D. Meringola (Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1997).
10.8 Joint Venture Agreement between the Registrant and Wujiang
Medical & Health Articles Factory dated March 29, 1989
(Exhibit 10(b) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1989).
10.9* Fourth Amended and Restated Revolving Credit Note and
Agreement between the Registrant and a lending institution
dated as of November 6, 1997.
10.10 Change in Control Agreement dated as of June 1, 1995 between
the Registrant and certain executive officers (Exhibit 10.8
to the Company's Annual Report on Form 10-K for the year
ended March 31, 1995).
14
<PAGE>
23.1* Consent of Grant Thornton LLP.
23.2* Consent of Ernst & Young LLP.
27* Financial Data Schedule
99* Additional Exhibit - Undertakings
(b) Reports on Form 8-K:
(i) Current report on Form 8-K dated January 7, 1998 re: Item 2
- Acquisition or Disposition of Assets.
(ii) Current report on Form 8-K dated January 15, 1998 re: Item 4
- Changes in Registrant's Certifying Accountant.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report.
- ----------------------
With the exception of the aforementioned information incorporated by
reference in this Annual Report on Form 10-K, the Company's Annual Report to
Stockholders for the year ended March 31, 1998 is not to be deemed "filed" as
part of this report.
*filed herewith
15
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 8th day of
June, 1998.
MEDICAL ACTION INDUSTRIES INC.
By: s/ Paul D. Meringola
----------------------------------
Paul D. Meringola
Chief Executive Officer
And President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on June 8, 1998 by the following persons in
the capacities indicated:
S/ Paul D. Meringola
- ------------------------------
Paul D. Meringola Chief Executive Officer, President
and Director
S/ Richard G. Satin
- ------------------------------
Richard G. Satin Vice President-Operations, General Counsel,
Corporate Secretary and Director
S/ Bernard Wengrover
- ------------------------------
Bernard Wengrover Director
S/ Philip F. Corso
- ------------------------------
Philip F. Corso Director
S/ Thomas A. Nicosia
- ------------------------------
Thomas A. Nicosia Director
16
<PAGE>
S-1
Schedule II - Valuation and Qualifying Accounts
Medical Action Industries Inc.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL.E
- ----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Additions Charged to Other
Balance at Charged to Other Changes- Balance
Beginning Costs and Accounts- Add (Deduct) End
Description of Period Expenses Describe Describe of Period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $110,953 $25,000 <$23,714>(1) $112,239
Year ended March 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts 110,953 110,953
Year ended March 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts 110,953 110,953
</TABLE>
- -------------------------------------
(1) Uncollectible accounts written off
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED March 31, 1998
------------------
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
EXHIBIT INDEX
===============================================================================
17
<PAGE>
Exhibit No.
10.9 Fourth Amended and Restated Revolving Credit Note and
Agreement between the Registrant and a lending institution
dated as of November 6, 1997.
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule
99 Additional Exhibit - Undertakings
18
<PAGE>
EXHIBIT 10.9
EUROPEAN AMERICAN BANK
FOURTH AMENDED AND RESTATED
REVOLVING CREDIT NOTE AND AGREEMENT
The within is an amendment and restatement of that certain
Amended and Restated Credit Note and Agreement in the
principal amount of $9,000,000 dated November 8, 1993 and
executed by the Borrower as hereinafter defined; said Note
having been previously amended and restated by a Second
Amended and Restated Revolving Credit Note and Agreement in
the principal amount of $10,000,000 dated August 9, 1994;
said Note having been previously modified by a Note
Modification Agreement dated February 10, 1995, and by a
Third Amended and Restated Revolving Credit Note and
Agreement dated October 24, 1995.
November 6, 1997
$12,000,000 Office Address: 730 Veterans Memorial Highway
Hauppauge, New York 11788
FOR VALUE RECEIVED, MEDICAL ACTION INDUSTRIES INC. (the "Borrower")
promises to pay to the order of EUROPEAN AMERICAN BANK (the "Bank") on or
before September 30, 2000 at the office of the Bank located at the place first
above stated or such other place as the holder thereof may from time to time
designate in writing, in lawful money of the United States of America in
immediately available funds, the principal sum of Twelve Million ($12,000,000)
Dollars (or such lesser amount as may then be the aggregate unpaid principal
balance of all loans made by the Bank to the Borrower hereunder (each a "Loan"
and collectively the "Loans"). The Borrower also promises to pay interest
(computed on the basis of a 360 day year for actual days elapsed) at said
office in like money on the unpaid principal amount hereof from time to time
outstanding from the date hereof until maturity at that rate equal to the
Bank's Prime Rate (the rate stated by the Bank to be its prime rate as in
effect from time to time), which interest rate shall change when and as the
Prime Rate changes. Interest shall be payable monthly on the first day of each
month commencing on the first such day to occur after the date hereof and upon
payment in full of the unpaid principal amount hereof. If any payment of
principal or interest becomes due on a day on which banks in New York, New York
are required or permitted by law to remain closed, such payment may be made on
the next succeeding business day on which such banks are open, and such
extensions shall be included in computing interest in connection with such
payment. The Borrower further agrees that this Note shall bear interest after
any stated or accelerated maturity hereof at a rate of three (3%) percent per
annum in excess of the rate hereinbefore provided for, payable on demand. In no
event shall interest payable hereunder be in excess of the maximum rate of
interest permitted under applicable law, the Borrower authorizes the Bank to
charge any of the Borrower's accounts for payments of principal and interest
hereunder.
<PAGE>
In consideration of the granting of the Loans evidenced by this Note,
the Borrower hereby agrees as follows:
1. Revolving Credit Commitment.
(a) The loan evidenced by this Note is available in one or
more advances (each a "Loan" and collectively the "Loans")
during the period which commences on the date hereof and ends
on September 30, 2000 (the "Credit Period") in an aggregate
principal amount up to, but not exceeding at any time
outstanding, the said principal sum of Twelve Million
($12,000,000) Dollars (the "Commitment"). During the Credit
Period, the Borrower may use the Commitment by borrowing,
prepaying in whole or in part and reborrowing, on a revolving
basis, all in accordance with the terms and conditions
hereof; provided, however, that each such Loan or prepayment
be in an amount not less than One Hundred Thousand ($100,000)
Dollars.
(b) The date and amount of each Loan and of each payment of
principal shall be maintained by the Bank in its books and
records at the time of each Loan or payment. All such
notations shall be presumed to be correct and the aggregate
net unpaid amount of Loans set forth therein shall be
presumed to be the principal balance hereof, except for
manifest error.
(c) Each request for a Loan shall be subject to the
satisfaction of the following conditions precedent:
(i) The Borrower shall have given the Bank notice of
such request, setting forth the amount of the Loan requested and the date
thereof. Such notice may be written or oral and shall be sufficient if received
by 1 p.m. of the date the Loan is requested. If the request is oral it shall be
thereafter confirmed in writing by the Borrower by telecopier to the Bank.
(ii) No Event of Default, or event which would be an
Event of Default but for the giving of notice or the passage of time or both,
has occurred and is continuing; and all of the representations and warranties
made by the Borrower in Section 4 hereof shall be true and correct on and as of
the date of such request as if made on and as of such date.
(d) The outstanding principal balance of the Loans
shall at no time exceed the lesser of the Commitment or the
aggregate amount available under the following Borrowing Base
(as such amount shall fluctuate from time to time):
(i) an amount equal to eighty (80%) percent of the
Borrower's "Eligible Accounts Receivable", which shall be defined as all
accounts of the Borrower, less (w) uncollectible accounts; (x) accounts
remaining unpaid after a date which is ninety (90) days after invoice date (120
days in the case of accounts due from hospitals); (y) accounts of account
debtors of which at least twenty-five (25%) percent of the sum of such accounts
remain unpaid after a date which is 90 days after invoice date (120 days in the
case of accounts due from hospitals); and (z) maximum discounts, rebates,
credits and allowances which may be taken by or granted to account debtors;
plus
<PAGE>
(ii) an amount equal to fifty-five (55%) percent of
the purchase price of inventory acquired pursuant to commercial letters of
credit (each an "L/C" and collectively the "L/Cs") issued hereunder; plus
(iii) the lesser of $8,000,000, or the amount equal
to fifty-five (55%) percent of the market value of "Eligible Inventory" on
hand. Eligible Inventory shall be defined as raw materials, inventory in
transit, all finished goods and shall not include work in process, packaging
material and inventory held outside the territorial jurisdiction of the United
States of America.
(e) Sublimits under the Commitment are available to
the Borrower in an amount equal to the lesser of the
Borrowing Base or $3,000,000 each for documentary Letters of
Credit (each an "Acceptance" and collectively the
"Acceptances"). For any advance made for an L/C, the Borrower
shall pay one-eighth of one (0.125%) percent upon each of the
opening and one-quarter of one (0.25%) percent upon
negotiation of the L/C. For each Standby L/C the Borrower
shall pay a fee equal to one and one-quarter (1.25%) percent
per annum upon the issuance of the Standby L/C. For any
advance made for an Acceptance, the Borrower shall pay a fee
equal to one and one-quarter (1.25%) percent per annum upon
the issuance of the Acceptance. Each L/C shall have a maximum
tenor of one (1) year, and shall be evidenced by the Bank's
standard letter of credit agreement. Each Standby L/C shall
have a maximum tenor of one hundred eight (180) days, and
shall be evidenced by the Bank's standard letter of credit
agreement. Acceptances have a maximum tenor of one hundred
eighty (180) days and shall be evidenced by the Bank's
standard acceptance credit agreement.
(f) Notwithstanding anything to the contrary herein
contained, the amount available for direct borrowings under
the Commitment, as set forth in Subsection 1(d) hereof, shall
be reduced by any and all amounts outstanding pursuant to the
borrowing sublimit set forth in Section 1(e) hereof.
2. Commitment Fee.
As additional compensation for providing the Loans described
herein, the Borrower agrees to pay the Bank a commitment fee for the Credit
Period at the rate of one-quarter of one (0.25%) percent per annum on the
average daily unused portion of the Commitment. Such commitment fee shall be
payable quarterly, on the first day of each December, February, May and August
during the Credit Period commencing on December 1, 1997.
3. Conditions Precedent.
Prior to the first Loan, the Borrower shall satisfy the
following conditions precedent including delivery to the Bank of the following:
(a) A favorable written opinion, dated of even date
herewith, of the Borrower's counsel (which counsel must be satisfactory to the
Bank) with respect to the matters set forth in Section 4 hereof with the
exception of Subsection 4(g);
<PAGE>
(b) A copy of the resolutions passed by the
Borrower's Board of Directors certified by its Secretary as being in full force
and effect on the date of this Agreement, authorizing the Loan herein provided
for, the execution, delivery and performance of this Note and any other
instrument or agreement required hereunder and containing a certificate of
incumbency as to the person or persons authorized to execute and deliver the
same;
(c) Evidence that the Bank has been named as loss
payee on the insurance maintained by the Borrower on its inventory. Said
insurance policy shall be issued by a financially sound and reputable insurance
company reasonably satisfactory to the Bank;
(d) The Bank shall have received at the closing the
sums of (i) Fifteen Thousand ($15,000) Dollars which represents the fee due
from the Borrower for the increase represented hereby, and Twelve Thousand Five
Hundred ($12,500) Dollars which represents the fee due from the Borrower for
the extension represented hereby.
4. Representations and Warranties. The Borrower hereby represents and
warrants to the Bank that:
(a) It is duly organized, validly existing and in
good standing under the laws of the state of its incorporation and is qualified
to do business and in good standing under the laws of each state where its
failure to so qualify would have a material adverse effect on its business,
operations and properties.
(b) This Note has been duly authorized, executed and
delivered and constitutes the valid and legally binding obligation of the
Borrower, enforceable in accordance with its terms.
(c) The execution and delivery of this Note and
performance hereunder will not violate any provision of law.
(d) There are no actions or proceedings pending
before any court or governmental authority, bureau or agency with respect to or
threatened against or affecting the Borrower, or any Subsidiary, which if
determined adversely would have a material adverse effect on the business, the
assets or the financial condition of the Borrower or any Subsidiary. As used
herein, the term "Subsidiary" or "Subsidiaries" means any corporation or
corporations of which the Borrower alone, or the Borrower and/or one or more of
its Subsidiaries, owns, directly or indirectly, at least a majority of the
securities having ordinary voting power for the election of directors.
(e) Neither the Borrower nor any Subsidiary is in
default under, or in violation of, any term of any agreement, ordinance,
resolution, decree, bond, note, indenture, or judgment to which it is a party
or by which it is bound, or by which any of the properties or assets owned by
it or used in the conduct of its business is affected, which default or
violation may have a materially adverse effect on the business, the assets or
the financial condition of the Borrower or any Subsidiary. The operations of
the Borrower and each Subsidiary comply in all respects with all laws,
ordinances and regulations applicable to them.
<PAGE>
(f) Neither the Borrower nor any Subsidiary is a
party to or bound by, nor are any of the properties or assets owned by it or
used in the conduct of its business affected by any agreement, ordinance,
resolution, decree, bond, note, indenture, order or judgment, or subject to any
charter or other corporate restriction, which materially and adversely affects
the business assets or financial condition of the Borrower or any Subsidiary.
(g) All balance sheets, profit and loss statements
and other financial information heretofore furnished to the Bank are true,
correct and complete and present fairly the financial condition of the Borrower
and its Subsidiaries as at the dates thereof and for the periods covered
thereby, including contingent liabilities of every kind which financial
condition has not materially adversely changed since the date of the most
recently dated balance sheet of the Borrower heretofore furnished to the Bank.
(h) No part of the proceeds of the Loans will be
used directly or indirectly for the purpose of purchasing or carrying, or for
payment in full or in part of indebtedness which was incurred for the purpose
of purchasing or carrying, any margin stock as such term is defined in Sec.
221.2 of Regulation U of the Board of Governors of the Federal Reserve System.
(i) The Borrower and its Subsidiaries are in
compliance in all material respects with the Employee Retirement Income
Security Act of 1974 ("ERISA") and all rules and regulations thereunder.
Neither the Borrower nor any of its Subsidiaries has any unfunded vested
liability under any type of plan described in Section 4021(a) of ERISA ("Plan")
and no reportable event, as set forth in Section 4043(b) of ERISA, has occurred
or is continuing with respect to any Plan.
5. Financial Statements. The Borrower shall deliver to the Bank:
(a) Annually, as soon as available, but in any event within
120 days after the last day of each of its fiscal years, the consolidated and
consolidating balance sheet of the Borrower, as at such last day of the fiscal
year, and consolidated and consolidating statements of income, retained
earnings and cash flows for such fiscal year, prepared in accordance with
generally accepted accounting principles consistently applied, in reasonable
detail. The consolidated statements delivered pursuant to this Section 5(a)
shall be certified without qualification by a firm of independent certified
public accountants satisfactory to the Bank and the consolidating statements
shall be internally prepared by the Borrower.
(b) As soon as available, but in any event within 60 days
after the end of each of its fiscal quarters, the 10-Q report filed or to be
filed with the Securities and Exchange Commission, and the consolidated and
consolidating balance sheet of the Borrower as at the last day of such fiscal
quarter, and consolidated and consolidating statements of income, retained
earnings and cash flows for the portion of the fiscal year through such date,
all in reasonable detail, each such statement to be prepared in accordance with
generally accepted accounting principles consistently applied. The consolidated
statements and consolidating statements referred to herein shall be internally
prepared by the Borrower.
(c) Promptly after a written request therefor, such other
financial data or information as the Bank may reasonably request from time to
time.
(d) At the same time as it delivers the financial statements
required under the provisions of Subsections 5(a) and 5(b), a certificate
signed by the president and principal accounting officer of the Borrower, to
the effect that no Event of Default hereunder or under any
<PAGE>
other agreement to which the Borrower or any Subsidiary is a party or by which
it is bound, or by which any of its properties or assets may be affected, and no
event which, with the giving of notice or the lapse of time, or both, would
constitute such an Event of Default, has occurred.
6. Affirmative Covenants. The Borrower will, and with respect to the
agreements set forth in Subsections 6(a) through 6(f) hereof, cause each
Subsidiary to:
(a) with respect to its properties, assets and business,
maintain insurance against loss or damage, to the extent that property, assets
and businesses of similar character are usually so insured by companies
similarly situated and operating like properties, assets or businesses with
responsible insurance companies satisfactory to the Bank; such insurance to be
endorsed to name the Bank as loss payee;
(b) duly pay and discharge all taxes or other claims which
might become a lien upon any of its property except to the extent that such
items are being in good faith appropriately contested;
(c) maintain, preserve and keeps its properties in good
repair, working order and condition, and make all reasonable repairs,
replacements, additions, betterments and improvements thereto;
(d) conducts its business in substantially the same manner
and in substantially the same fields as such business is now carried on and
conducted;
(e) comply with all statutes, rules and regulations and
maintain its corporate existence;
(f) permit the Bank to make or cause to be made annual field
audits of any books, records and papers of the Borrower at the Borrower's sole
cost and expense at times reasonably required by the Bank, and to permit the
Bank to make such other audits of its books, records and papers at the Bank's
expense at all such reasonable times and as often as the Bank may require;
(g) use the proceeds of the Loans for the following purposes
and for no other purpose: To finance inventory purchases by and accounts
receivable of the Borrower, and to refinance any amounts outstanding under an
existing line of credit provided to the Borrower from the Bank;
(h) deliver to the Bank, as soon as available, but in any
event within 60 days after the end of each of its fiscal quarters, a
certificate signed by the president and principal accounting officer certifying
the value of the Borrower's Eligible Accounts Receivable and Inventory;
(i) deliver to the Bank, as soon as available, but in any
event within 15 days after the end of each calendar month, borrowing base
certificates, accounts receivable aging and inventory schedules all in form and
substance satisfactory to the Bank;
(j) maintain a minimum Capital Base ("Capital Base") (to be
equal to the sum of capital surplus, earned surplus and capital stock minus
deferred charges, intangibles, treasury
<PAGE>
stock, officer and employee loans receivable, and joint venture investments and
advances and assets held for disposition) of not less than the following:
Period Minimum Capital Base
------ --------------------
Through March 31, 1998 $10,000,000
April 1, 1998 through March 31, 1999 $10,750,000
April 1, 1999 through March 31, 2000 $11,500,000
April 1, 2000 through Maturity $12,250,000
(k) maintain a Current Ratio, the ratio of current assets to
current liabilities (current liabilities shall include all borrowings
hereunder) of not less than 1.6:1 at all times during the term hereof;
(m) maintain a maximum ratio of total unsubordinated
liabilities ("TUL") to Capital Base of not greater than the following:
Period Maximum TUL to Capital Base
------ ---------------------------
Through March 31, 1998 1.7:1
April 1, 1998 through March 31, 1999 1.55:1
April 1, 1997 through Maturity 1.5:1
(n) maintain at each fiscal year end a ratio of Earnings
Before Interest and Taxes for each fiscal year to interest expenditure for such
fiscal year of not less than 1.25:1.
(o) immediately give notice to the Bank that an Event of
Default has occurred or that an event which, with the giving of notice or lapse
of time, or both, would constitute an Event of Default, has occurred and
specifying the action which the Borrower has taken and proposes to take with
respect thereto.
7. Negative Covenants. The Borrower will not, and will not permit any
Subsidiary to:
(a) incur, or permit to exist, any indebtedness for borrowed
money, exclusive of borrowings hereunder and of any other loans made by the
Bank in its discretion to the Borrower or any Subsidiary, other than existing
loans for the purchase of equipment and existing indebtedness disclosed on the
Borrower's balance sheet as of the date hereof, and future purchase money loans
for the purchase of equipment.
(b) enter into any merger or consolidation or liquidation,
wind up or dissolve itself or sell, transfer or lease or otherwise dispose of
all or any substantial part of its assets (other than in the ordinary course of
business) or acquire by purchase or otherwise the business or assets of, or
stock of, another corporation except to the extent permitted by paragraph 7(g)
below; except that any Subsidiary may merge into or consolidate with any other
Subsidiary which is wholly-owned by the Borrower, and any Subsidiary which is
wholly-owned by the Borrower may merge with or consolidate into the Borrower
provided that the Borrower is the surviving corporation;
<PAGE>
(c) lend or advance money, credit or property to or invest in
(by capital contribution, loan, purchase or otherwise) any firm, corporation,
or other person other than existing loans made prior to March 31, 1992 or
officer loans in the maximum amount of Two Hundred Fifty Thousand ($250,000)
Dollars per officer and Five Hundred Thousand ($500,000) Dollars in the
aggregate, except investments in United States Government obligations and
certificates of deposit of any banking institution with combined capital and
surplus of at least Two Hundred Thousand ($200,000) Dollars;
(d) create, assume or permit to exist, any mortgage, pledge,
lien or encumbrance of or upon or security interest in, any of its property or
assets now owned or hereafter acquired except (i) mortgages, liens, pledges and
security interests in favor of the Bank; (ii) other liens, charges and
encumbrances incidental to the conduct of its business or the ownership of its
property and assets which were not incurred in connection with the borrowing of
money or the obtaining of advances or credit and which do not materially impair
the use thereof in the operation of its business; (iii) liens for taxes or
other governmental charges which are not delinquent or which are being
contested in good faith and for which a reserve shall have been established in
accordance with generally accepted accounting principles; and (iv) mortgage
liens existing as of the date hereof;
(e) assume, endorse, be or become liable for or guarantee the
obligations of any person except by the endorsement of negotiable instruments
for deposit or collection in the ordinary course of business;
(f) declare or pay any dividends on its capital stock (other
than dividends payable solely in shares of its own common stock), or purchase,
redeem, retire or otherwise acquire any of its capital stock at any time
outstanding, except that any Subsidiary wholly-owned by the Borrower may
declare and pay dividends to the Borrower;
(g) expend in excess of Two Million ($2,000,000) Dollars per
fiscal year, or Five Million ($5,000,000) Dollars in the aggregate during the
term hereof, for the acquisition of any other company or entity, or the assets
thereof (provided, however, that no such acquisition shall be permitted unless
the Borrower shall have demonstrated to the Bank on a pro forma basis that the
Borrower shall remain in full compliance with all requirements and covenants
herein after said acquisition).
(h) expend annual capital expenditures in excess of Six
Million Five Hundred Thousand ($6,500,000) Dollars during the fiscal year
ending March 31, 1998 and One Million Five Hundred Thousand ($1,500,000)
Dollars thereafter (capital expenditures under the aforementioned maximum
levels can be applied to
the next two fiscal years).
(i) (i) terminate any Plan so as to result in any material
liability to The Pension Benefit Guaranty Corporation established pursuant to
Subtitle A of Title IV of ERISA (the "PBGC"), (ii) engage in or permit any
person to engage in any "prohibited transaction" (as defined in Section 406 or
ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended)
involving any Plan which would subject the Borrower to any material tax,
penalty or other liability, (iii) incur or suffer to exist any material
"accumulated funding deficiency" (as defined in Section 302 of ERISA), whether
or not waived, involving any Plan, or (iv) allow or suffer to exist any event
or condition which presents a material risk of incurring a material liability
to the PBGC by reason of termination of any Plan.
<PAGE>
8. Collateral Security. As collateral security for the payment of any
and all sums owing under this Note and all other obligations, direct or
contingent, joint, several or independent, of the Borrower and of any
Subsidiary and each endorser or guarantor hereof now or hereafter existing, due
to or to become due to, or held, or to be held by, the Bank, whether created
directly or acquired by assignment or otherwise (all of such obligations,
including this Note, are hereinafter called the "Obligations"), the Borrower
hereby grants to the Bank a first priority lien on and security interest in all
of the Borrower's inventory and accounts receivable and any and all deposits or
other sums at any time credited by or due from the Bank to the Borrower,
whether in regular or special depository accounts or otherwise, and any and all
monies, securities and other property of the Borrower, and the proceeds
thereof, now or hereafter held or received by or in transit to the Bank from or
for the Borrower, whether for safekeeping, custody, pledge, transmission,
collection or otherwise, and any such deposits, sums, monies, securities and
other property may at any time after the occurrence of any Event of Default be
set-off, appropriated and applied by the Bank against any of the Obligations
whether or not such Obligations are then due or are secured by any collateral,
or, if they are so secured, whether or not such collateral held by the Bank is
considered to be adequate and with respect to all collateral security the Bank
shall have all the rights and remedies available to it under the Uniform
Commercial Code of New York and other applicable law.
9. Events of Default. If any one or more of the following events
("Events of Default") shall occur, the entire unpaid balance of the principal
of and interest on the Obligations shall immediately become due and payable:
(a) Failure to make any payment of principal or interest in
respect of any of the Obligations when due; or,
(b) Failure to observe any of the covenants in Sections 6 and
7 hereof; or,
(c) Failure by the Borrower to perform any other term,
condition or covenant of this Note or any other agreement, instrument or
document delivered pursuant hereto or in connection herewith or therewith,
which shall remain unremedied for a period of 15 days after notice thereof
shall have been given by the Bank to the Borrower; or,
(d) (i) Failure to perform any term, condition or covenant of
any bond, note, debenture, loan agreement, indenture, guaranty, trust
agreement, mortgage or other instrument or agreement in connection with the
borrowing of money or the obtaining of advances or credit to which the Borrower
or any Subsidiary is a party or by which it is bound, or by which any of its
properties or assets may be affected (a "Debt Instrument"), so that, as a
result of any such failure to perform (regardless of the satisfaction of any
requirement for the giving of appropriate notice thereof or the lapse of time),
the indebtedness included therein or secured or covered thereby may be declared
due and payable prior to the date on which such indebtedness would otherwise
become due and payable; or,
(ii) any event or condition referred to in any Debt
Instrument shall occur or fail to occur, so that, as a result thereof
(regardless of the satisfaction of any requirement for the giving of appropriate
notice thereof or the lapse of time), the indebtedness included therein or
secured or covered thereby may be declared due and payable prior to the date on
which such indebtedness would otherwise become and payable; or,
(iii) any indebtedness included in any Debt
Instrument or secured or covered thereby is not paid when due; or
(e) Any representation or warranty made in writing to the
Bank in this Note or in connection with the making of the Loans evidenced
hereby or any certificate, statement or report made in compliance with this
Note, shall have been false in any material respect when made; or,
<PAGE>
(f) An order for relief under the United States Bankruptcy
code as now or hereafter in effect, shall be entered against the Borrower or
any Subsidiary; or the Borrower or any Subsidiary shall become insolvent,
generally fail to pay its debts as they become due, make an assignment for the
benefit of creditors, file a petition or apply to any tribunal for the
appointment of a receiver or any trustee for its or a substantial part of its
assets, or shall commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution, or liquidation law or statute
of any jurisdiction, whether now or hereafter in effect; or if there shall have
been filed any such petition or application, or any such proceeding shall have
been commenced against it, which remains undismissed for a period of thirty
days or more; or the Borrower or any Subsidiary or endorser or guarantor hereof
by any act or omission shall indicate its consent to, approval of or
acquiescence in any such petition, application or proceeding or the appointment
of a receiver of or any trustee for it or any substantial part of any of its
properties, or shall suffer any such receivership or trusteeship to continue
undischarged for a period of thirty days or more; or,
(g) Any judgment in excess of $100,000 against the Borrower
or any Subsidiary or any attachment, levy or execution against any of its
properties for any amount shall remain unpaid, unstayed on appeal,
undischarged, unbonded or undismissed for a period of sixty days or more; or,
(h) The Bank shall have determined, in its sole discretion,
that one or more conditions exist or events have occurred which may result in a
material adverse change in the business, properties or financial condition of
the Borrower.
10. Interest Adjustment. Notwithstanding anything to the contrary
contained in this Note, the rate of interest payable on this Note shall never
exceed the maximum rate of interest permitted under applicable law. If at any
time the rate of interest otherwise prescribed herein shall exceed such maximum
rate, and such prescribed rate is thereafter below such maximum rate, the
prescribed rate shall be increased to the maximum rate for such period of time
as is required so that the total amount of interest received by the Bank is
that which would have been received by the Bank, except for the operation of
the first sentence of this Section 10.
11. Miscellaneous.
(a) All agreements, representations and warranties made
herein shall survive the delivery of this Note. The Borrower waives trial by
jury, set-off and counterclaim of any nature or description other than
mandatory counterclaims in any litigation in any court with respect to, in
connection with, or arising out of, this Note or any instrument or document
delivered pursuant hereto or the validity, protection, interpretation,
collection or enforcement hereof.
(b) No modification or waiver of or with respect to any provision of this
Note, or consent to any departure by the Borrower from any of the
terms or conditions hereof, shall in any event be effective unless it
shall be in writing and signed by the Bank, and then such waiver or
consent shall be effective only in the specific instance and for the
purpose for which given. No notice to or demand on the Borrower in any
case shall, of itself, entitle it to any other or further notice or
demand in similar or other circumstances.
(c) Each and every right granted to the Bank hereunder or
under any other document delivered hereunder or in connection herewith, or
allowed it by law or equity, shall be cumulative and may be exercised from time
to time. No failure on the part of the Bank or the holder of this Note to
exercise, and no delay in exercising, any right shall operate as a waiver
thereof, nor shall any single or partial exercise of any right preclude any
other further exercise thereof or the exercise of any other right.
<PAGE>
(d) In the event that this Note is placed in the hands of an
attorney for collection by reason of any default hereunder, the Borrower agrees
to pay reasonable attorney's fees so incurred. The Borrower promises to pay all
expenses of any nature as soon as incurred whether in or out of court and
whether incurred before or after this Note shall become due at is maturity date
or otherwise and costs which the Bank may deem necessary or proper in
connection with the satisfaction of the indebtedness or the administration,
supervision, preservation, protection (including but not limited to maintenance
of adequate insurance) of or the realization upon the collateral.
(e) The Borrower hereby waives presentment, demand for
payment, protest, notice of protest, notice of dishonor, and any or all other
notices or demands except as otherwise expressly provided for herein.
(f) All accounting terms not otherwise defined in this Note
shall have the meanings ascribed thereto under generally accepted accounting
principles.
12. Notices. All notices, requests and other communications pursuant
to this Note shall be in writing, either by letter (delivered by hand or sent
by certified mail, return receipt requested) or overnight mail, addressed as
follows:
(a) if to the Borrower:
Medical Action Industries Inc.
150 Motor Parkway
Hauppauge, New York 11788
Attn: Richard G. Satin
Vice President and General Counsel
and, (b) if to the Bank:
European American Bank
730 Veterans Memorial Highway
Hauppauge, New York 11788
Attn: Richard Romano
Vice President
Any notice, request or communication hereunder shall be deemed to have been
given when deposited in the mails, postage prepaid, or in the case of
telegraphic notice, when delivered to the telegraph company, addressed as
aforesaid. Any party may change the person or address to whom or which the
notices are to be given hereunder, but any such notice shall be effective only
when actually received by the party to whom it is addressed.
13. Governing Law. This Note and the rights and obligations of the
parties shall be construed and interpreted in accordance with the laws of the
State of New York and the Borrower consents to the jurisdiction of the courts
of New York in any action brought to enforce any rights of the Bank under this
Note.
MEDICAL ACTION INDUSTRIES INC.
By: s/ Paul D. Meringola
--------------------------------------
Paul D. Meringola, President
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Medical Action Industries Inc. of our report dated May 28, 1998, included in
the 1998 Annual Report to Stockholders of Medical Action Industries Inc.
Our audit also includes the financial statement schedule of Medical Action
Industries Inc. for the year ended March 31, 1998 listed in item 14(a). This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audit. In our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-11046) pertaining to the Incentive Stock Option Plan and
Restricted Management Stock Bonus Plan and Registration Statements (Form S-8 No.
33-41765, Form S-8 No. 33-66038 and Form S-8 No. 333-14993) pertaining to the
Non-Qualified Stock Option Plan and the 1994 Stock Incentive Plan, and the
Registration Statement (Form S-8 No. 333-35015) pertaining to the 1996
Non-Employee Directors Stock Option Plan of Medical Action Industries Inc. of
our report dated May 28, 1998, with respect to the financial statements
incorporated herein by reference and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Medical Action Industries Inc.
GRANT THORNTON LLP
Melville, New York
May 28, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Medical Action Industries Inc. of our report dated May 23, 1997, included in
the 1998 Annual Report to Stockholders of Medical Action Industries Inc.
Our audits also include the financial statement schedule of Medical Action
Industries Inc. for each of the two years in the period ended March 31, 1997
listed in item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-11046) pertaining to the Incentive Stock Option Plan and
Restricted Management Stock Bonus Plan; the Registration Statements (Form S-8,
No. 33-41765, Form S-8, No. 33-66038 and Form S-8, No. 333-14993) pertaining to
the Non-Qualified Stock Option Plan and the 1994 Stock Incentive Plan; and the
Registration Statement (Form S-8, No. 333-35015) pertaining to the 1996 Non-
Employee Directors Stock Option Plan of Medical Action Industries Inc. of
our report dated May 23, 1997, with respect to the financial statements
incorporated herein by reference and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Medical Action Industries Inc.
ERNST & YOUNG LLP
Melville, New York
May 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 275
<SECURITIES> 0
<RECEIVABLES> 6,537
<ALLOWANCES> 117
<INVENTORY> 13,577
<CURRENT-ASSETS> 20,715
<PP&E> 11,750
<DEPRECIATION> 3,870
<TOTAL-ASSETS> 31,804
<CURRENT-LIABILITIES> 9,727
<BONDS> 0
<COMMON> 8
0
0
<OTHER-SE> 15,571
<TOTAL-LIABILITY-AND-EQUITY> 31,804
<SALES> 54,640
<TOTAL-REVENUES> 54,640
<CGS> 42,274
<TOTAL-COSTS> 51,021
<OTHER-EXPENSES> 260
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 603
<INCOME-PRETAX> 2,756
<INCOME-TAX> 1,072
<INCOME-CONTINUING> 1,684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,684
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.19
</TABLE>
<PAGE>
EXHIBIT 99
The following undertakings are incorporated into the Company's Registration
Statements on Form S-8 (Registration Nos. 33-11046, 33-41765, 33-66038,
333-14993 and 333-35015).
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement.
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any fact or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering thereof.
(e) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
