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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8 - K/A
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13 or 15 (d) of
THE SECURITIES EXCHANGE ACT OF 1934
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in charter)
AMENDMENT NO. 2
The undersigned registrant hereby amends the following items,
financial statements, exhibits or other portions of its May 28, 1999 Current
Report on Form 8-K as set forth in the pages attached hereto:
Item 7 - Financial statements and Exhibits
(a) Financial Statement of Business Acquired
(b) Pro Forma Combined Balance Sheets at December 31, 1998
(Medical Action Industries Inc.) and December 31, 1998
(Acquired Business)
(c) Exhibits
(1) Consent of Ernst & Young LLP
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by
the undersigned thereunto duly authorized.
MEDICAL ACTION INDUSTRIES INC.
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(Registrant)
Date: July 19, 1999 By: /s/ Richard G. Satin
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Richard G. Satin
(Principal Accounting Officer)
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Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Acme United Corporation
We have audited the accompanying statement of inventories, equipment and
patents of the Medical Business of Acme United Corporation (the "Company") as
of December 31, 1998, and the statement of net sales, and direct costs and
expenses for the year then ended. These statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements are free if material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the inventories, equipment and patents of the Medical
Business of Acme United Corporation at December 31, 1998, and its net sales,
and direct costs and expenses for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Hartford, Connecticut
February 5, 1999
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The Medical Business of Acme United Corporation
Statement of Inventories, Equipment and Patents
December 31, 1998
Inventories:
Finished goods $ 1,258,000
Work in process 315,000
Raw materials and supplies 1,085,000
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2,658,000
Equipment, less accumulation depreciation of $545,000 241,000
Patents 1,000
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$ 2,900,000
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See accompanying notes.
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The Medical Business of Acme United Corporation
Statement of Net Sales, and Direct Costs and Expenses
Year ended December 31, 1998
Net sales $ 10,090,000
Direct costs and expenses:
Cost of goods sold 7,240,000
Selling, general and administrative 2,547,000
Research and development 64,000
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9,851,000
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Net sales in excess of direct cost and expenses $ 239,000
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See accompanying notes.
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The Medical Business of Acme United Corporation
Notes to Financial Statements
December 31, 1998
1. Basis of Presentation
Acme United Corporation ("Acme") is in negotiations to sell certain assets and
the related business of its medical business ("Medical Business") to Medical
Action Industries Inc. ("MAI"). The Medical Business consists of production
and distribution of metal disposable medical scissors, instruments and sterile
procedure trays. Medical products are produced at Acme's Goldsboro, North
Carolina plant which also produces other non-medical products for Acme that
are unrelated to the Medical Business. The Goldsboro facility also serves as a
warehouse and distribution center for both Acme's medical products and
non-medical products. Additionally, disposable medical instruments and
scissors are produced at Acme's Fremont, North Carolina plant which also
manufactures non-medical products.
The Medical Business is not a legal entity and the assets and liabilities
associated with the Medical Business are components of a larger business. As a
result, while separate financial information is maintained for the Medical
Business inventory, accounts receivable, sales, and direct expenses, no
separate asset, liability and expense accounts are maintained for the Medical
Business or the other business of Acme. Accordingly, the information included
in the accompanying statements has been obtained from Acme's consolidated
financial records. The accompanying financial statements present the
inventories, equipment and patents of the Medical Business expected to be sold
to MAI as of December 31, 1998 and the net sales, and direct costs and
expenses of the Medical Business for the year then ended. This information is
not intended to be a complete presentation of the assets and liabilities, and
expenses of the Medical Business.
The accompanying financial statements were prepared for inclusion in the
current report on Form 8-K of MAI and do not purport to reflect the assets and
liabilities or results of operations that would have resulted if the Medical
Business had operated as an unaffiliated independent company.
Certain direct expenses incurred by Acme on behalf of the Medical Business as
well as certain Goldsboro and Fremont plant costs have been allocated to the
Medical Business (discussed in Note 2) on various bases which, in the opinion
of management, are reasonable. However, these allocated expenses and costs are
not necessarily indicative of expenses and costs that would have been incurred
had the Medical Business been operating as a separate company.
In connection with the contemplated sale of the Medical Business to MAI, Acme
and MAI expect to enter into a transition services agreement (the "Transition
Services Agreement"). Under the Transition Services Agreement, Acme will
provide certain services to MAI to facilitate the transfer of the Medical
Business to it. The Transition Services Agreement will cover various services
including those related to manufacturing, supply chain, sales, marketing, and
accounting.
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The Medical Business of Acme United Corporation
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in them and the accompanying disclosures.
Although these estimates are based on management's best knowledge of current
events and actions Acme may undertake in the future, actual results ultimately
may differ from the estimates.
Revenue Recognition
Sales are recorded at the time products are shipped. Net sales reflect units
shipped at selling list price less direct deductions therefrom, including
discounts and allowances, outbound freight, and returns. Customers are located
throughout the United States.
Inventory Valuation
Inventories are stated at the lower of average cost (first in, first out
method) or market.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
calculated using the straight line method over the estimated useful lives of
the equipment, primarily 3 to 15 years.
Cost of Goods Sold
Cost of goods sold includes allocations of costs to the Medical Business
activities, including warehousing, shipping, utilities, insurance, quality
control, and employee costs. These plant costs are allocated between the
Medical Business and other non-medical products that are produced at the
Goldsboro and Fremont plants based primarily on standard costs of goods sold,
number of employees, usage, and square footage. In the opinion of management,
these allocations were made on a reasonable basis. However, cost of goods sold
is not necessarily indicative of the costs which might have been incurred had
the Medical Business been operating as a separate company.
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The Medical Business of Acme United Corporation
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Selling, General and Administrative
Certain selling, general and administrative expenses not otherwise
specifically identifiable with the Medical Business are allocated based on
estimates of time and effort spent, number of employees, and sales volume.
Such allocated expenses primarily include public affairs/investor relations,
finance and accounting, human resources, information systems, selling and
other administrative activities. In the opinion of management, these
allocations of direct expenses were made on a reasonable basis. However, such
expenses are not necessarily indicative of the level of expenses which might
have been incurred had the Medical Business been operating as a separate
company.
Research and Development
Research and development costs are expensed as incurred.
3. Security
The assets in the accompanying statement of inventories, equipment and patents
are pledged as collateral for Acme's bank debt. A release from the bank is
required for their sale.
4. Contingencies
Acme is involved in certain legal proceedings related to its business
operations including the Medical Business. Based upon the advice of its
counsel and product liability insurance carrier, management believes the
outcome of litigation that relates to the Medical Business will not have a
material effect on the Medical Business' operating results.
5. Leases
As referred to above Acme leases the Goldsboro facility under a long-term
operating lease which expires October 31, 2000. Rent expense under this lease
for 1998 has been allocated to the Medical Business based on utilized square
footage.
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The Medical Business of Acme United Corporation
Notes to Financial Statements (continued)
6. Costs and Expenses
Costs and expenses for the year ended December 31, 1998 include:
Depreciation $ 234,000
Rent expense under long-term operating leases 174,000
7. Year 2000 (Unaudited)
Acme has substantially assessed the impact of Year 2000 on its computer and
other systems, including those applicable to the Medical Business. Acme has
developed a plan and is currently in the process of making the necessary
modifications to achieve substantial compliance within the next year. Acme
does not expect the costs relating thereto to have a material effect on future
operating results or cash flow.
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Unaudited Pro Forma Financial Data
On March 22, 1999, Registrant, pursuant to an Asset Purchase
Agreement dated as of March 9, 1999 between the Registrant and Acme United
Corporation, a Connecticut corporation ("Acme"), acquired certain of the
assets relating to the medical products business of Acme.
The Purchase price for the assets acquired was approximately
$8,475,967 of which $7,475,967 was paid at or prior to the closing, with the
balance paid over the three (3) month period ending on or about June 15, 1999,
which includes the Registrant issuing to Acme at closing a warrant (the
"Warrant") to purchase 50,000 shares of its common stock at a purchase price
of $2.84 per share. The aggregate fair value of the Warrant, $73,500, has been
estimated using the Black Scholes Option Pricing Model.
The assets acquired included inventory, factory and office equipment,
trademarks, patents, and a patent application used in the manufacture of
Acme's medical products, including (i) kit and tray products, including suture
removal trays, I.V. start kits, and central line trays; (ii) net, padding,
wound care and antiseptic products, including Acu-Dyne(Registered), an
antimicrobial solution of povidone iodine prep swabs, and a line of proprietary
Tubegauze(Registered) elastic netting used in dressing retention; and (iii)
instrument packs, which include a broad line of sterile instruments, such as
hemostats, scalpels and forceps (hereinafter the "Products").
The factory and office equipment acquired by the Registrant for the
manufacture of the Products will continue to be used by the Registrant in its
facility in Arden, North Carolina for the manufacture of the Products.
The acquisition of the Acme business will be accounted for
as a purchase pursuant to Accounting Principles Board Opinion No. 16, and
accordingly, the Registrant has allocated the purchase price to its fair
market value of the assets acquired as follows:
Inventory $2,183,946.00
Factory and Office Equipment 336,250.00
Goodwill & Trademarks 5,955,771.00
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$8,475,967.00
Goodwill and trademarks will be amortized over a twenty (20) year
period.
The Registrant utilized the funds available under its Revolving
Credit Note and Loan Agreement (the "Loan Agreement") with European American
Bank in order to satisfy the purchase price. The funds provided under the Loan
Agreement were made in the ordinary course of business.
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The following unaudited pro forma balance sheet combines the
financial position of Medical Action Industries Inc. (the "Company") as of
December 31, 1998 and the net assets acquired of the medical business of Acme
United Corporation as of December 31, 1998 as if the Company had acquired the
net assets on December 31, 1998. A pro forma statement of operations has not
been presented as certain historical operating results of the medical business
of Acme United Corporation is not available.
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Medical Action Industries Inc.
Pro Forma Balance Sheets
December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Medical Action Medical Business of Pro Forma
Industries Inc. Acme United Corp. Pro Forma Combined
Description December 31, 1998 December 31, 1998 Adjustments December 31, 1998
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<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 550,000 $ $ 550,000
Accounts receivable, net 7,107,000 7,107,000
Inventories 12,228,000 2,658,000 Note 1 (474,054) 14,411,946
Prepaid Expenses 400,000 400,000
Other current Assets 60,000 60,000
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Total current assets 20,345,000 2,658,000 (474,054) 22,528,946
Property and equipment, net 7,825,000 241,000 Note 2 95,250 8,161,250
Investment in Joint Ventures 345,000 345,000
Due from Officers 484,000 484,000
Intangibles 2,291,000 Note 3 5,955,771 8,246,771
Patents - 1,000 Note 3 (1,000) -
Other Assets 126,000 126,000
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Total Assets $ 31,416,000 $2,900,000 $ 5,575,967 $ 39,891,967
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Liabilities and Shareholders' Equity
Current liabilities
Accounts Payable $ 1,023,000 $ 1,023,000
Accrued expenses, payroll and payroll
taxes 1,240,000 1,240,000
Accrued income taxes 65,000 65,000
Current portion of capital lease
obligations 148,000 148,000
Notes payable to bank 4,982,000 4,982,000
Other note payable - Note 4 $ 1,000,000 1,000,000
Current portion of long-term debt 360,000 360,000
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Total current liabilities 7,818,000 - 1,000,000 8,818,000
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Deferred income taxes 355,000 355,000
Capital lease obligations, less current
portion 327,000 327,000
Long-term debt, less current portion 5,430,000 Note 5 7,402,467 12,832,467
Shareholders' equity:
Common stock 9,000 9,000
Additional paid in capital 9,151,000 2,900,000 Note 6 (2,826,500) 9,224,500
Retained earnings 8,326,000 8,326,000
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Total Shareholders' equity 17,486,000 2,900,000 (2,826,500) 17,559,500
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Total liabilities and shareholders' equity $ 31,416,000 2,900,000 $ 5,575,967 $ 39,891,967
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Medical Action Industries Inc.
` Notes to Pro Forma Balance Sheet
December 31, 1998
(unaudited)
1. Adjustment to record the estimated fair market value of inventories
acquired.
2. Adjustment of fixed assets acquired to estimate fair market value on date
of acquisition.
3. To record the value of intangible assets acquired consisting of
trademarks and the excess cost of net assets acquired.
4. In connection with the acquisition, the Company withheld $1,000,000 of
the purchase price, subject to adjustment as defined in a transition
plan. Such amount is expected to be paid in installments through June 15,
1999.
5. To reflect the cash purchase price of Acme, which was financed by
additional long term borrowings under the Company's credit facility.
6. Reflects elimination of the excess net assets over liabilities acquired
and records the estimated fair value of warrants, estimated using the
Black Scholes Option Pricing Model, to purchase 50,000 shares of the
Company's common stock at an exercise price of $2.94 per share.
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EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-11046) pertaining to the 1984 Incentive Stock Option Plan and
Restricted Management Stock Bonus Plan of Medical Action Industries Inc., the
Registration Statements (Form S-8 Nos. 33-41765, 33-66038, 333-14993 and
333-65585) pertaining to the 1989 Non-Qualified Stock Option Plan and the 1994
Stock Incentive Plan of Medical Action Industries Inc., and the Registration
Statement (Form S-8 No. 333-35015) pertaining to the 1996 Non-Employee
Director Stock Option Plan of Medical Action Industries Inc. of our report
dated February 5, 1999, with respect to the statement of inventories,
equipment and patents of the Medical Business of Acme United Corporation as of
December 31, 1998 and its statement of net sales, and direct costs and
expenses for the year then ended included in the Current Report on Form 8-K/A
of Medical Action Industries Inc. dated May 28, 1999, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Hartford, Connecticut
May 28, 1999
