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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________to________
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 4, 1999 was approximately
$23,400,000. As of June 4, 1999, registrant had outstanding 8,595,289
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 1999 Annual Meeting of Stockholders and (2) registrant's
Annual Report to Stockholders for the fiscal year ended March 31, 1999.
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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. 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 contracts 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.
During the past several years, the Company has had an active
acquisition program and has completed six transactions since 1994. 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. The QuanTech line
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(TM), as well as a counting system known as
Pocket Count(TM).
In March 1999, the Company acquired the medical products division of
Acme United Corporation. Acme Healthcare, one of the first companies to design
and sell disposable instrument kits and trays, is principally comprised of three
product categories - (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(R), an anti-microbial solution of
povidone iodine which comes in various packages and applicators, and a line of
proprietary Tubegauze(R) elastic netting used in dressing retention; and (iii)
instrument packs, which include a broad line of sterile instruments, such as
hemostats, scalpels, forceps and needle holders.
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The Company focuses 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.
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, 1999,
1998 and 1997, laparotomy sponges accounted for 34%, 36 % and 41%, respectively,
of the Company's total sales.
Absorbent Operating Room Towels - The Company's line of cotton
absorbent operating room towels 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, 1999, 1998
and 1997, operating room towels accounted for 31%, 34% and 29%, respectively,
of the Company's total sales.
Gauze Sponges - 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.
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:
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(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 ShieldsTM - A patented
design assures a secure fit and acts as a sterile barrier on surgical light
handles in the operating room. Light ShieldsTM 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.
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.
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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(TM),
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 produces
a uniquely designed and patented sponge counting system known as
SAFE-T-Count(TM).
Autoclavable Bags - Bags used for autoclaving and sterilizing
infectious waste.
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.
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Kit and Tray Products - The Company offers a proprietary One Time (R)
brand of kit and tray products, which are packaged for use in a wide variety of
minor procedures. Both procedural requirements and hospital preference determine
tray components, and most contain proprietary items such as: ACU-dyne(R), an
anti-microbial solution of povidone iodine which comes in various packages and
applicators; and the One Time(R) brand of disposable instruments and
antiseptics. Several examples of kit and tray configurations for various
procedures are as follows:
(a) Suture Removal Tray - Typically includes littauer scissors, alcohol
prep pads, metal or plastic forceps, sponges and ACU-dyne(R) prep
swabs.
(b) I.V. Start Kit - Typically includes a tourniquet, ACU-dyne(R)
ampule and ointment, alcohol prep pads, and a dressing.
(c) Central Line Tray - Typically includes alcohol swabs and prep pads,
ACU-dyne(R) swabs and ointment, Benzoin, a cotton-tipped applicator,
gauze tape and a dressing.
Net, Padding and Wound Care - Includes proprietary Tubegauz(R) premium
brand and SePro(R) value brand elastic nets, which are tubular bandages used for
dressing retention. This category also includes Tubegauz(R) brand tubular gauze,
which is used to bandage fingers, toes, hands, or other areas that require
wrapping to bodily contours. Padding products are used as a protective
cushioning material for sensitive areas, and are sold in styles that offer
unique characteristics such as being mold-resistant, water-repellant or designs
for improved air circulation.
Instrument Packs - Includes a broad array of needle holders, hemostats,
various procedural scissors, scalpels and forceps.
Patents and Trademarks
The Company actively pursues a policy of seeking patent protection,
both in the United States and abroad, for its proprietary technology. There can
be no assurance that the Company's patents will not be violated or that any
issued patents will provide protection that has commercial significance.
Litigation may be necessary to protect the Company's patent position. Such
litigation may be costly and time-consuming, and there can be no assurance that
the Company will be successful in such litigation. Since no single patent covers
product lines that constitute 5% or more of any sales of the Company for fiscal
1999, the Company does not believe that any violation of any patents owned by
the Company would have a material adverse effect on it or its business
prospects.
The Company owns several patents and trademarks. While it considers
that in the aggregate the patents and trademarks are important in the operation
of its business, it does not consider that any of them, or any group of them,
are of such importance that termination would materially affect its business.
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.
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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 the Kendall Company, a subsidiary
of Tyco Industries, Inc. 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, a subsidiary of Cardinal Health, Inc., 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, a 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 subsidiary of Tyco Industries, Inc.
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.
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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 6 manufacturers' representatives and 19
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.
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 1999, 1998 and
1997 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 $446,000, $364,000 and
$315,000 for the fiscal years ended March 31, 1999, 1998 and 1997, respectively.
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Employees
As of June 1, 1999, the Company had 223 full-time employees with 168 in
manufacturing and distribution, 36 in marketing and sales, and 19 in
administration. None of the Company's employees are represented by a labor
union. The Company believes that its employee relations are satisfactory.
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, medical instruments, 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 and to a lesser extent,
India and is currently sourcing instruments from Pakistan. The Company's
operating room towels which are imported from the Peoples Republic of China 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. The Company continually
explores alternate sources of supply for all of its raw materials.
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 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 Wu Jiang 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, medical pouches and Acme Healthcare
products 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 19,100 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 $224,652. 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
-------- ----------- -----------
Arden, North Carolina Manufacturing/
Warehouse/Distribution 205,000 (a)
Hauppauge, New York Executive Offices 7,400 (b)
Farmingdale, New York Warehouse 3,700 (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 $5,320,000 was
outstanding as of March 31, 1999, 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 $179,700.
(c) Premises are leased on a month to month basis at an annual rental of
$29,352.
(d) Premises are leased through January 14, 2000 at an annual rental of
$44,160. Approximately 7,455 square feet are subleased to an
unaffiliated third party at an annual rental of $28,560.
ITEM THREE - LEGAL PROCEEDINGS
The Company is a party to several lawsuits arising out of the conduct
of its business in the ordinary course. 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 1999
Annual Report to Stockholders under the captions "Selected Financial Data" and
"Stock Trading", which information is hereby incorporated herein by reference.
ITEM SIX - SELECTED FINANCIAL DATA
The information required by this Item is set forth in registrant's 1999
Annual Report to Stockholders contained under the caption "Selected Financial
Data", which information is hereby incorporated herein by reference.
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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 1999
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 Company's "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.
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 SEVEN (A) - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in registrant's 1999
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.
ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in registrant's 1999
Annual Report to Stockholders under the captions "Reports of Independent
Certified Public Accountants", "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.
11
<PAGE>
ITEM NINE - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 1999, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended March 31, 1999.
PART IV
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, 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 its Annual Report to Stockholders for the year
ended March 31, 1999, are incorporated by reference in Item 8:
Balance Sheets at March 31, 1999 and 1998
Statements of Earnings
for the Years Ended March 31, 1999, 1998 and 1997
Statement of Shareholders'
Equity for the Years Ended March 31, 1999, 1998 and 1997
Statements of Cash Flows
for the Years Ended March 31, 1999, 1998 and 1997
Notes to Financial Statements
The following financial statement schedule of Medical Action Industries
Inc. and Report of Independent Certified Public Accountants is included in
Item 14(d):
Report of Independent Certified Public Accountants on Schedule
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).
12
<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).
2.3 Asset Purchase Agreement dated as of March 9, 1999 between
Acme United Corporation and Registrant (Exhibit 2 to the
Company's Current Report on Form 8-K dated April 1, 1999).
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. Meringolo (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. Meringolo (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. Meringolo (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 Revolving Credit Note and Agreement between the Registrant and
a lending institution dated as of March 18, 1999 (Exhibit 10
to the Company's Current Report on Form 8-K dated April 1,
1999).
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).
23.1* Consent of Grant Thornton LLP.
23.2* Consent of Ernst & Young LLP.
13
<PAGE>
27* Financial Data Schedule
99* Additional Exhibit - Undertakings
(b) Reports on Form 8-K:
(i) Current report on Form 8-K dated April 1, 1999 re: Item 2 -
Acquisition or Disposition of Assets.
(ii) Amendment No. 1 to current report on Form 8-K dated May 28,
1999 re: Item 2 - Acquisition or Disposition of Assets.
(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, 1999 is not to be deemed "filed" as
part of this report.
* Filed herewith
14
<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 this 18th day of
June, 1999.
MEDICAL ACTION INDUSTRIES INC.
By: /s/ Paul D. Meringolo
---------------------------
Paul D. Meringolo
Chief Executive Officer
And President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on June 18, 1999 by the following persons in
the capacities indicated:
/s/ Paul D. Meringolo Chief Executive Officer, President
- --------------------- and Director
Paul D. Meringolo
/s/ Richard G. Satin Vice President-Operations, General Counsel,
- -------------------- Corporate Secretary and Director
Richard G. Satin
/s/ Bernard Wengrover Director
- ---------------------
Bernard Wengrover
/s/ Philip F. Corso Director
- -------------------
Philip F. Corso
/s/ Thomas A. Nicosia Director
- ---------------------
Thomas A. Nicosia
15
<PAGE>
Report of Independent Certified Public Accountants on Schedule
Stockholders and Board of Directors
Medical Action Industries Inc.
In connection with our audit of the financial statements of Medical Action
Industries Inc. referred to in our report dated May 28, 1999, which is included
in the Annual Report to Shareholders and incorporated by reference in Part II of
this form, we have also audited Schedule II for each of the two years in the
period ended March 31, 1999. In our opinion, this schedule presents fairly, in
all material respects, the information reuqired to be set forth therein.
GRANT THORNTON LLP
Melville, New York
May 28, 1999
<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
Balance at Charged to Other Changes - End
Beginning Costs and Accounts - Add (Deduct) of
Of Period Expenses Describe Describe Period
Description------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended March 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $117,086 $27,000 ($15,088)(1) $128,998
Year ended March 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $112,239 $28,000 ($23,153)(1) $117,086
Year ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $110,953 $25,000 ($23,714)(1) $112,239
</TABLE>
- ------------
(1) Uncollectible accounts written off
<PAGE>
Exhibit Index
-------------
Exhibit No.
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ernst & Young LLP
27 Financial Data Schedule
99 Additional Exhibit - Undertakings
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report on Form 10-K
for the year ended March 31, 1999 of our report dated May 28, 1999 included in
the 1999 Annual Report to Stockholders of Medical Action Industries Inc.
We also 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 and Registration Statements (Form S-8 No.
33-41765, Form S-8 No. 33-66038, Form S-8 No. 333-14993 and Form S-8 No.
333-65585) pertaining to the 1989 Non-Qualified Stock Option Plan and the 1994
Stock Incentive Plan and 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 reports dated May 28, 1999, included and
incorporated by reference in this Annual Report on Form 10-K of Medical Action
Industries Inc. for the year ended March 31, 1999.
GRANT THORNTON LLP
Melville, New York
May 28, 1999
<PAGE>
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 1999 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, 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, Form S-8 No. 333-14993 and Form S-8 No.
333-65585) pertaining to the 1989 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
June 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> MAR-31-1999
<CASH> 672
<SECURITIES> 0
<RECEIVABLES> 6,195
<ALLOWANCES> 129
<INVENTORY> 15,502
<CURRENT-ASSETS> 22,744
<PP&E> 12,881
<DEPRECIATION> 4,511
<TOTAL-ASSETS> 40,153
<CURRENT-LIABILITIES> 8,550
<BONDS> 0
<COMMON> 9
0
0
<OTHER-SE> 17,887
<TOTAL-LIABILITY-AND-EQUITY> 40,153
<SALES> 57,500
<TOTAL-REVENUES> 57,500
<CGS> 44,216
<TOTAL-COSTS> 53,757
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 576
<INCOME-PRETAX> 3,167
<INCOME-TAX> 1,252
<INCOME-CONTINUING> 1,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,915
<EPS-BASIC> .23
<EPS-DILUTED> .21
</TABLE>
<PAGE>
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, 333-35015 and 333-65585).
(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.
(3) 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
<PAGE>
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.
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.
