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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-13251
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2421849
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Motor Parkway, Hauppauge, New York 11788
(Address of Principal executive offices)
Registrant's telephone number, including area code:
(516)231-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 8,447,039 shares of
common stock as of July 22, 1998.
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Form 10-Q
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CONTENTS
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Balance Sheets at June 30, 1998 (Unaudited) and March 31, 1998
Statements of Income for the Three Months ended June 30, 1998 and 1997
(Unaudited)
Statements of Cash Flows for the Three Months ended June 30, 1998 and
1997 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II - OTHER INFORMATION
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MEDICAL ACTION INDUSTRIES INC.
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Balance Sheets
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(dollars in thousands)
----------------------
ASSETS
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June 30, March 31,
1998 1998
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(Unaudited)
CURRENT ASSETS:
Cash $ 274 $ 275
Accounts receivable, less allowance for
doubtful accounts of $123 at
June 30, 1998 and $117 at March 31, 1998 6,634 6,420
Inventories 15,324 13,577
Prepaid expenses 449 360
Other current assets 75 83
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TOTAL CURRENT ASSETS 22,756 20,715
Property, plant and equipment, net 7,771 7,880
Investment in joint venture 388 409
Due from officers 256 256
Excess of cost over net assets acquired,
less accumulated amortization of $536
at June 30, 1998 and $496 at
March 31, 1998 2,371 2,411
Other Assets 129 133
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TOTAL ASSETS $33,671 $31,804
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The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC.
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Balance Sheets
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(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
June 30, March 31,
1998 1998
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(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 1,800 $ 1,441
Accrued expenses, payroll and payroll taxes 1,052 959
Accrued income taxes 225 24
Current portion of capital lease obligations 140 140
Notes payable to bank 6,997 6,983
Current portion of long-term debt 360 180
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TOTAL CURRENT LIABILITIES 10,574 9,727
Deferred income taxes 355 355
Capital lease obligations, less
current portion 353 383
Long-term debt, less current portion 6,275 5,760
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TOTAL LIABILITIES 17,557 16,225
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized,
$.001 par value; issued and outstanding
8,447,039 shares at June 30, 1998 and
8,401,039 shares at March 31, 1998 8 8
Additional paid-in capital, net of
deferred compensation of $168 at
June 30, 1998 and $197 at March 31, 1998 8,777 8,656
Retained earnings 7,329 6,915
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TOTAL SHAREHOLDERS' EQUITY 16,114 15,579
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,671 $31,804
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The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC.
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Statements of Income
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(dollars in thousands except per share data)
Three Months Ended
June 30,
1998 1997
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(Unaudited) (Unaudited)
Net Sales $ 14,139 $ 13,077
Cost of Sales 10,926 10,235
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Gross Profit 3,213 2,842
Selling, general and administrative
expenses 2,359 2,056
Interest expense 170 162
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Income before income taxes 684 624
Income tax expense 270 257
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Net income $ 414 $ 367
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Net Income per share basic $ .05 $ .05
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Net income per share diluted $ .05 $ .04
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The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC.
Statement of Cash Flows
(dollars in thousands)
Three Months Ended June 30,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income $ 414 $ 367
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 220 189
Provision for doubtful accounts 6 6
Deferred compensation 29 31
Changes in operating assets and liabilities:
Accounts receivable (220) 68
Inventories (1,747) 815
Prepaid expenses, and other current
assets (81) (60)
Other assets 4 (101)
Accounts payable 359 46
Income taxes payable 201 219
Accrued expenses, payroll
and payroll taxes 93 334
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NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (722) 1,914
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INVESTING ACTIVITIES
Purchase of property and equipment (50) (215)
Proceeds from sale of property
and equipment -- 1
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NET CASH USED IN
INVESTING ACTIVITIES (50) (214)
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FINANCING ACTIVITIES
Proceeds from revolving line of
credit and long-term borrowings 1,295 537
Principal payments on revolving line of
credit, long-term debt, other note payable
and capital lease obligations (616) (2,002)
Proceeds from exercise of
employee stock options 92 14
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 771 (1,451)
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(DECREASE) INCREASE IN CASH (1) 249
Cash at beginning of year 275 275
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Cash at end of period $ 274 $ 524
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The accompanying notes are an integral part of these financial statements.
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MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY
---------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q for quarterly reports under section 13 or
15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three month
period ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ended March 31, 1999. For further information,
refer to the financial statements and footnotes thereto included in the
Company's annual report for the year ended March 31, 1998.
Note 2. INVENTORIES
Inventories, which are stated at the lower of cost (first-in, first-out) or
market, consist of the following:
June 30, March 31,
1998 1998
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(Unaudited)
(in thousands of dollars)
Finished Goods $ 4,920 $ 5,781
Work in Process 349 0
Raw Materials 10,055 7,796
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Total $ 15,324 $ 13,577
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Note 3. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with the basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per
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share. All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to the Statement 128 requirements. The
following table sets forth the computation of basic and diluted earnings per
share for the three months ended June 30, 1998 and for the three months ended
June 30, 1997.
Three Months Ended
June 30
------------------------
1998 1997
(Unaudited) (Unaudited)
Dollars in thousands except
per share data
Numerator:
- ----------
Net income for basic
and dilutive earnings
per share $ 414 $ 367
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Denominator:
- ------------
Denominator for basic
earnings per share -
weighted average shares 8,349,892 8,143,142
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Effect of dilutive securities:
Employee stock options 651,420 519,164
Non-vested restricted stock 75,097 98,172
Warrants 33,580 19,052
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Dilutive potential common shares 760,097 636,388
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Denominator for diluted earnings
per share - adjusted weighted
average shares 9,109,989 8,779,530
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Basic earnings per share $ .05 $ .05
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Diluted earnings per share $ .05 $ .04
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-Looking Statement
- -------------------------
This report on Form 10-Q contains forward-looking statements as defined by
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance and financial
results of the Company. The forward-looking statements related to (i) the
expansion of the Company's market share, (ii) the Company's growth into new
markets, (iii) the development of new products and product lines to appeal to
the needs of the Company's customers, (iv) the procurement of export visas for
raw materials for operating room towels from China, which may impact the
availability and pricing of operating room towels, and (v) the retention of the
Company's earnings for use in the operation and expansion of the Company's
business.
Important factors and risks that could cause actual results to differ materially
from those referred to in the forward-looking statements include, but are not
limited to, the effect of economic and market conditions, the impact of the
consolidation throughout the healthcare supply chain, the impact of healthcare
reform, opportunities for acquisitions and the Company's ability to effectively
integrate acquired companies, the ability of the Company to maintain its gross
profit margins, the ability to obtain additional financing to expand the
Company's business, the failure of the Company to successfully compete with the
Company's competitors that have greater financial resources, the loss of key
management personnel or the inability of the Company to attract and retain
qualified personnel, the availability and possible increases in raw material
prices for operating room towels, the impact of current or pending legislation
and regulation, as well as the risks described from time to time in the
Company's filings with the Securities and Exchange Commission, which include
this report on Form 10-Q and the Company's annual report on Form 10-K for the
year ended March 31, 1998.
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.
9
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Results of Operations
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Three months ended June 30, 1998 compared to three months ended June 30, 1997
- -----------------------------------------------------------------------------
Net sales for the three months ended June 30, 1998 increased 8% to $14,139,000
from $13,077,000 for the three months ended June 30, 1997. The increase in net
sales was primarily attributed to a $522,000, or 35%, increase in net sales of
the SBW product line which includes net sales from Dayhill Corp., acquired in
October 1997; a $183,000, or 4%, increase in net sales of laparotomy sponges;
and a $175,000, or 15%, increase in net sales of the QuanTech product line.
Management believes that the increase in net sales of the SBW product line,
laparotomy sponges and the QuanTech product line 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. The export visas could
adversely impact the availability and pricing of operating room towels. In order
to reduce the effects of the quota restrictions, the Company has accelerated its
procurement of operating room towels from China. Management presently
anticipates that it will be able to meet the Company's requirements of operating
room towels through fiscal 1999, however higher pricing for such raw materials
which the Company began incurring in the fourth quarter of fiscal 1998, due to
the availability of export visas, could adversely effect the Company.
Gross profit for the three months ended June 30, 1998 increased 13% to
$3,213,000 from $2,842,000 for the three months ended June 30, 1997. Gross
profit as a percentage of net sales for the three months ended June 30, 1998
increased to 23% of net sales from 22% of net sales for the three months ended
June 30, 1997. The increase in gross profit dollars and gross profit percentage
was primarily attributable to the increase in net sales and increased
manufacturing efficiencies.
Selling, general and administrative expenses for the three months ended June 30,
1998 increased 15% to $2,359,000 from $2,056,000 for the three months ended June
30, 1997. As a percentage of net sales, selling, general and administrative
expenses increased to 17% for the three months ended June 30, 1998 from 16% for
the three months ended June 30, 1997. The increase in selling, general and
administrative expense dollars and as a percentage of net sales was primarily
attributable to increased commissions and distributor fees associated with
increased sales volume.
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Interest expense for the three months ended June 30, 1998 increased 5% to
$170,000 from $162,000 for the three months ended June 30, 1997.
Net income for the three months ended June 30, 1998 increased to $414,000 from
$367,000 for the three months ended June 30, 1997. The increase in net income is
attributable to the aforementioned increase in net sales and gross profits,
which were partially offset by an increase in selling, general and
administrative expenses and interest expense.
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of $12,182,000 with a current ratio of 2.2 at
June 30, 1998 as compared to working capital of $10,988,000 with a current ratio
of 2.1 on March 31, 1998. Total bank borrowings outstanding, including
Industrial Revenue Bonds of $5,500,000, were $13,632,000 with a debt to equity
ratio of .85 at June 30, 1998 as compared to $12,923,000 with a debt to equity
ratio of .83 at March 31, 1998. The increase in total borrowings outstanding at
June 30, 1998 was primarily attributable to the increase in inventories of
operating room towels.
The Company believes that the anticipated future cash flow from operations,
coupled with its cash on hand and available funds under its revolving credit
agreements, will be sufficient to meet working capital requirements.
11
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MEDICAL ACTION INDUSTRIES INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings against the Company or in which
any of this property is subject.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
Note
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICAL ACTION INDUSTRIES INC.
Date: July 31, 1998 By: s/ Richard G. Satin
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Richard G. Satin, Vice President
(Principal Accounting Officer)
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