<PAGE>
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, 1999
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. 9,071,289 shares of
common stock as of August 12, 1999.
<PAGE>
Form 10-Q
---------
CONTENTS
--------
PART I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Balance Sheets at June 30, 1999 (Unaudited) and March 31, 1999
Statements of Earnings for the Three Months ended June 30, 1999 and
1998 (Unaudited)
Statements of Cash Flows for the Three Months ended June 30, 1999 and
1999 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II- OTHER INFORMATION
-----------------
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MEDICAL ACTION INDUSTRIES INC.
------------------------------
Balance Sheets
--------------
(dollars in thousands)
----------------------
ASSETS
------
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
---- ----
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 117 $ 672
Accounts receivable, less allowance for
doubtful accounts of $136 at
June 30, 1999 and $129 at March 31, 1999 8,529 6,066
Inventories 13,943 15,502
Prepaid expenses 376 300
Deferred income taxes 118 118
Other current assets 61 87
------------- -------------
TOTAL CURRENT ASSETS: 23,144 22,745
Property, plant and equipment, net 8,391 8,371
Due from officers 283 283
Intangibles,
less accumulated amortization of $773
at June 30, 1999 and $657 at
March 31, 1999 8,134 8,205
Other Assets 525 549
------------ ------------
TOTAL ASSETS: $ 40,477 $ 40,153
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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MEDICAL ACTION INDUSTRIES INC.
------------------------------
Balance Sheets
--------------
(dollars in thousands)
----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
---- ----
(Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 2,030 $ 1,880
Accrued expense, payroll and payroll taxes 1,355 1,088
Accrued income taxes 185
-
Current portion of capital lease obligations 161 162
Notes payable to bank 2,613 4,060
Other note payable - 1,000
Current portion of long-term debt 360 360
------------ ------------
TOTAL CURRENT LIABILITIES: 6,704 8,550
Deferred income taxes 496 496
Capital lease obligations, less 220 251
current portion 14,236 12,960
---------- ----------
Long-term debt, less current portion
21,656 22,257
TOTAL LIABILITIES:
SHAREHOLDERS' EQUITY:
525 549
------------ ------------
Common stock 15,000,000 shares authorized %.001 par value; issued and
outstanding 9,071,289 shares at June 30,1999 and
8,574,289 shares at March 31, 1999 9 8
Additional paid-in capital, net 9,301 9,057
Retained earnings 9,511 8,831
----------- -----------
TOTAL SHAREHOLDERS' EQUITY: 18,821 17,896
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY: $ 40,477 $ 40,153
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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MEDICAL ACTION INDUSTRIES INC.
------------------------------
Statements of Earnings
----------------------
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $ 17,913 $ 14,139
Cost of Sales 14,435 10,926
---------- ----------
Gross Profit 4,478 3,213
Selling, general and administrative
expenses 3,130 2,359
Interest expense 234 170
---------- ----------
Income before income taxes 1,114 684
Income tax expense 434 270
---------- ----------
Net income $ 680 $ 414
========== ==========
Basic and diluted earnings per share $ .08 $ .05
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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MEDICAL ACTION INDUSTRIES INC.
Statement of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net Income $ 680 $ 414
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 315 220
Provision for doubtful accounts 7 6
Deferred compensation 16 29
Changes in operating assets and liabilities:
Accounts receivable (2,470) (220)
Inventories 1,522 (1,747)
Prepaid expenses, and other current assets (74) (81)
Other assets 3 4
Accounts payable 150 359
Income taxes payable 399 201
Accrued expenses, payroll and payroll taxes 267 93
---------- -----------
Net cash provided by (used in) operating activities 815 (722)
---------- -----------
Investing Activities
Purchase price and related acquisition costs (8) -
Purchase of property and equipment (198) (50)
----------- ------------
Net cash used in investing activities (206) (50)
----------- ------------
Financing Activities
Proceeds from revolving line of
credit and long-term borrowings 1,961 1,295
Principal payments on revolving line of credit,
long-term debt, other note payable
and capital lease obligations (3,164) (616)
Proceeds from exercise of employee stock options 39 82
----------- -----------
Net cash (used in) provided by financing activities (1,164) 771
----------- -----------
Decrease in cash (555) (1)
Cash at beginning of year 672 275
----------- -----------
Cash at end of period $ 117 $ 274
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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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 (3) month
period ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended March 31, 2000. For further information,
refer to the financial statements and footnotes thereto included in the
Company's annual report for the year ended March 31, 1999.
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,
1999 1999
---- ----
(Unaudited) (Unaudited)
(in thousands of dollars)
Finished Goods $ 5,693 $ 6,740
Work in Process 148 -
Raw Materials 8,102 8,762
---------- ----------
Total $ 13,943 $ 15,502
========== ==========
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 share. All earnings per share
amounts for all periods have been presented, and 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, 1999 and for the
three months ended June 30, 1998.
7
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<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
-------------
1999 1998
(Unaudited) (Unaudited)
Dollars in thousands except
per share data
Numerator:
- ----------
<S> <C> <C>
Net income for basic and dilutive earnings
per share $ 680 $ 414
Denominator:
- ------------
Denominator for basic earnings per share -
weighted average shares 8,614,558 8,349,892
------------ --------------
Effect of dilutive securities:
Employee stock options 359,365 651,420
Non-vested restricted stock 18,944 75,097
Warrants 19,074 33,580
----------- -------------
Dilutive potential common shares 397,383 760,097
----------- -------------
Denominator for diluted earnings per share -
adjusted weighted average shares 9,011,941 9,109,989
=========== =============
Basic and diluted earnings per share $ .08 $ .05
=========== =============
</TABLE>
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Note 4. ACQUISITIONS
On March 22, 1999, the company acquired certain assets of the medical products
business of Acme United Corporation, a Connecticut Corporation ("Acme"), The
purchase price for the assets acquired was $8,484,000 of which $7,476,000 was
paid at or prior to closing, with the balance paid on or about June 15, 1999.
Included in the payment at closing was the fair value of Warrants (valued at
$73,500) to purchase 50,000 shares of its common stock at a purchase price of
$2.84 per share.
The assets acquired included principally inventory, factory and office equipment
and trademarks, 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(R), an anti-microbacterial solution of povidone iodine prep
swabs and a line of proprietary Tubegauz(R) elastic netting used in dressing
retention; and (iii) instrument packs which include a broad line of sterile
instruments such as hemostats, scalpels and forceps. The acquisition has been
accounted for as a purchase and the operations of Acme have been included in the
Company's Statement of Earnings since the acquisition date. The excess of the
purchase price and related expenses over the net tangible assets and trademarks
acquired ("Goodwill") amounted to $5,524,000 and is being amortized over twenty
(20) years.
Proforma information is not presented as complete historical operating results
of Acme are not available.
The following table summarizes the assets acquired from Acme:
Inventory............................................. $2,147,000
Factory and Office Equipment.................. 336,000
Trademarks.......................................... 447,000
Goodwill.............................................. 5,524,000
-----------
$8,484,000
Note 5. EXERCISE OF EMPLOYEE STOCK OPTIONS
For the three (3) months ended June 30, 1999, 497,000 stock options were
exercised by employees and officers of the Company in accordance with the
Company's 1994 Stock Incentive Plan and the Company's 1989 Non-Qualified Stock
Option Plan. The exercise price of the options exercised ranged from $.97 per
share to $2.375 per share. Employees exercised 22,000 shares with cash proceeds
of $39,490. Officers exercised 475,000 shares at the combined exercise price of
$784,600. The exercise price for each of the options exercised by the officers
has been loaned to the respective officer by the Company, which is evidenced by
a non-interest bearing demand note and secured by the shares issued thereunder
pursuant to a Pledge Agreement. The aggregate loan amount of $784,600 has been
deducted from Shareholder's equity.
9
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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, 1999.
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.
10
<PAGE>
Results of Operations
- ---------------------
Three months ended June 30, 1999 compared to three months ended June 30, 1998
- -----------------------------------------------------------------------------
Net sales for the three months ended June 30, 1999 increased 27% to $17,913,000
from $14,139,000 for the three months ended June 30, 1998. The increase in net
sales was primarily attributed to $2,619,000 in net sales of the Acme product
line acquired in March 1999; a $428,000, or 7%, increase in net sales of
laparotomy sponges; and a $893,000, or 21%, increase in net sales of the
operating room towel product line. Management believes that the increase in net
sales of laparotomy sponges and the operating room towel product line was
primarily due to greater domestic market penetration.
The Company presently obtains a portion of its raw materials for operating room
towels from China. These operating room towels are designated as a textile, for
which an export visa is required. These export visas could adversely impact the
availability and pricing of operating room towels. In the event that these quota
restrictions reduce the availability of operating room towels, the Company will
accelerate its procurement of operating room towels from China and secure
operating room towels from sources outside of China. Management presently
anticipates that it will be able to meet the Company's requirements of operating
room towels through fiscal 2000.
Gross profit for the three months ended June 30, 1999 increased 39% to
$4,478,000 from $3,213,000 for the three months ended June 30, 1998. Gross
profit as a percentage of net sales for the three months ended June 30, 1999
increased to 25% of net sales from 23% of net sales for the three months ended
June 30, 1998. 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,
1999 increased 33% to $3,130,000 from $2,359,000 for the three months ended June
30, 1998. As a percentage of net sales, selling, general and administrative
expenses remained at 17% for the three months ended June 30, 1999 and for the
three months ended June 30, 1998. The increase in selling, general and
administrative expense dollars was primarily attributable to increased
commissions and distributor fees associated with increased sales volume and
increased administrative costs as a result of the Acme product line acquisition.
Interest expense for the three months ended June 30, 1999 increased 38% to
$234,000 from $170,000 for the three months ended June 30, 1998. This increase
in interest expense was due to the interest expense associated with the
acquisition of the Acme product line. Net income for the three months ended June
30, 1999 increased to $680,000 from $414,000 for the three months ended June 30,
1998. 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
11
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interest expense.
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of $16,440,000 with a current ratio of 3.5 at
June 30, 1999 as compared to working capital of $14,195,000 with a current ratio
of 2.7 at March 31, 1999. Total borrowings outstanding, including Industrial
Revenue Bonds of $5,230,000, were $17,209,000 with a debt to equity ratio of .91
at June 30, 1999 as compared to $18,380,000 with a debt to equity ratio of 1.03
at March 31, 1999. The decrease in total borrowings outstanding at June 30, 1999
was primarily attributable to the reduction of the cash balance and net cash
provided by operating activities.
The Company has financed its operations primarily through cash flow from
operations and borrowings from its existing credit facilities. At June 30, 1999,
the Company had a cash balance of $117,000 compared to $672,000 at March 31,
1999.
The Company's operating activities provided cash of $815,000 for the three (3)
months ended June 30, 1999 as compared to ($722,000) cash used in operating
activities for the three (3) months ended June 30, 1998. Net cash provided for
the three (3) months ended June 30, 1999 consisted primarily of net income from
operations, decreases in inventories, depreciation and amortization and
increases in accrued expenses and income taxes payable. These sources of cash
more than offset the increase in accounts receivable associated with increased
sales.
Investing activities used net cash of $206,000 and $50,000 for the three (3)
months ended June 30, 1999 and June 30, 1998, respectively. The principal uses
for the three months (3) ended June 30, 1999 were purchases of property and
equipment.
Financing activities used cash of ($1,164,000) for the three (3) months ended
June 30, 1999 compared to $771,000 provided by financing activities for the
three (3) months ended June 30, 1998. The cash used in financing activities
along with the decrease in the cash balance was used to pay down the Company's
debt in connection with its credit facilities and to pay off the note payable in
connection with the Acme acquisition.
At June 30, 1999, the Company did not have any material commitments for capital
expenditures.
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.
The Company has substantially completed its program to prepare computer systems
and applications for the Year 2000. The Company expects to incur additional;
internal staff costs as well as consulting and other expenses related to
enhancements necessary to
12
<PAGE>
complete the systems for the Year 2000. The Company is also communicating with
customers and suppliers with whom it conducts business to help identify and
resolve any potential Year 2000 issues. Management has not quantified the
remaining Year 2000 compliance and related expenses to be incurred, however,
management believes the remaining costs will not have a material affect on its
financial position.
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
The Company is exposed to interest rate change market risk with respect to its
credit facility with a financial institution which is priced based on the prime
rate of interest plus a spread of up to 1/4%, libor rate plus a spread of up to
2 1/2%, or at 1 1/4% over the prevailing bankers acceptance rate. The spread
over prime and libor rates is determined based upon the Company's performance
with regard to agreed upon financial ratios. The Company decides at its sole
discretion as to whether borrowings will be at prime, libor or bankers
acceptance rates. At June 30, 1999, $11,979,000 was outstanding under the credit
facility. Changes in the prime rate, libor rates or bankers acceptance rates
during fiscal 2000 will have a positive or negative effect on the Company's
interest expense. Each 1% fluctuation in the interest rate will increase or
decrease interest expense for the Company by approximately $120,000 on an
annualized basis.
In addition, the Company is exposed to interest rate change market risk with
respect to the proceeds received from the issuance and sale by the Buncombe
County Industrial and Pollution Control Financing Authority Industrial
Development Revenue Bonds. At June 30, 1999, $5,230,000 was outstanding for
these Bonds. The Bonds bear interest at a variable rate determined weekly.
During fiscal 1999, the interest rate on the Bonds approximated 3.5%. Each 1%
fluctuation in interest rates will increase or decrease interest expense on the
Bonds by approximately $52,000 on an annualized basis.
A significant portion of the Company's raw materials are purchased from China
and to a lesser extent from India. All such purchases are transacted in U.S.
dollars. The Company's financial results, therefore, could be impacted by
factors such as changes in foreign currency, exchange rates or weak economic
conditions in foreign countries in the procurement of such raw materials. To
date, sales of the Company's products outside the United States have not been
significant.
13
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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
(i) Amendment No. 1 dated May 28, 1999 to Current Report on
Form 8-K relating to Item 7-Financial Statements, Pro
Forma Financial Information and Exhibits
14
<PAGE>
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: August 12, 1999 By: /s/Richard G. Satin
------------------- ------------------------------
Richard G. Satin, Vice President
(Principal Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from [identify
specific financial statements(s)] and is qualified in its entirety by reference
to such financial statement(s).
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 117
<SECURITIES> 0
<RECEIVABLES> 8665
<ALLOWANCES> 136
<INVENTORY> 13943
<CURRENT-ASSETS> 23144
<PP&E> 12807
<DEPRECIATION> 4416
<TOTAL-ASSETS> 40477
<CURRENT-LIABILITIES> 6704
<BONDS> 0
<COMMON> 9
0
0
<OTHER-SE> 18812
<TOTAL-LIABILITY-AND-EQUITY> 40477
<SALES> 17913
<TOTAL-REVENUES> 17913
<CGS> 14435
<TOTAL-COSTS> 17565
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234
<INCOME-PRETAX> 1114
<INCOME-TAX> 434
<INCOME-CONTINUING> 680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 680
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
