<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 DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-13251
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
DELWARE 11-2421849
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Motor Parkway, Hauppauge, New York 11788
(Address of Principal Executive Offices)
Registrant's telephone number, including area code:
(516) 231-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 8,575,539 shares of
common stock as of January 31, 1999.
<PAGE>
Form 10-Q
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at December 31, 1998 (Unaudited) and March 31, 1998
Statements of Earnings for the Three and Nine Months ended December
31, 1998 and December 31, 1997 (Unaudited)
Statements of Cash Flows for the Nine Months ended December 31, 1998
and December 31, 1997 (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
2
<PAGE>
MEDICAL ACTION INDUSTRIES INC.
Balance Sheets
(dollars in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 550 $ 275
Accounts Receivable, less allowance for
doubtful accounts of $137 at December 31,
1998 and $117 at March 31, 1998 7,107 6,420
Inventories 12,228 13,577
Prepaid expenses 400 360
Other current assets 60 83
------- -------
TOTAL CURRENT ASSETS 20,345 20,715
Property, plant and equipment , net 7,825 7,880
Investment in joint venture 345 409
Due from officers 484 256
Excess of cost over net assets acquired,
less accumulated amortization of $616
at December 31, 1998 and $496 at
March 31, 1998 2,291 2,411
Other Assets 126 133
------- -------
TOTAL ASSETS $31,416 $31,804
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MEDICAL ACTION INDUSTRIES INC.
Balance Sheets
(dollars in thousands)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,023 $ 1,441
Accrued expenses, payroll and payroll taxes 1,240 959
Accrued income taxes 65 24
Current portion of capital lease obligations 148 140
Notes payable to bank 4,982 6,983
Current portion of long-term debt 360 180
------- -------
TOTAL CURRENT LIABILITIES 7,818 9,727
Deferred income taxes 355 355
Capital lease obligations, less
current portion 327 383
Long-term debt, less current portion 5,430 5,760
------- -------
TOTAL LIABILITIES 13,930 16,225
SHAREHOLDERS' EQUITY:
Common stock 15,000,000 shares authorized,
$.001 par value; issued and outstanding
8,565,539 shares at December 31, 1998 and
8,401,039 shares at March 31, 1998 9 8
Additional paid-in capital, net of deferred
compensation of $100 at December 31, 1998
and $197 at March 31, 1998 9,151 8,656
Retained earnings 8,326 6,915
------- -------
TOTAL SHAREHOLDERS' EQUITY 17,486 15,579
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $31,416 $31,804
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
MEDICAL ACTION INDUSTRIES INC.
Statements of Earnings
(dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
-------- ---------
<S> <C> <C>
Net Sales $14,667 $14,024
Cost of Sales 11,218 10,853
-------- --------
Gross Profit 3,449 3,171
Selling, general and administrative
expenses 2,482 2,294
Interest expense 132 143
-------- --------
Income before income taxes 835 734
Income tax expense 333 301
-------- --------
Net Income $ 502 $ 433
======== =========
Net Income per share basic $ .06 $ .05
======== =========
Net Income per share diluted $ .06 $ .05
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
MEDICAL ACTION INDUSTRIES INC.
Statements of Earnings
(dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1997
-------- ---------
<S> <C> <C>
Net Sales $43,308 $40,777
Cost of Sales 33,277 31,565
-------- --------
Gross Profit 10,031 9,212
Selling, general and administrative
expenses 7,244 6,419
Interest expense 457 466
Restructuring charges -- 273
-------- --------
Income before income taxes 2,330 2,054
Income tax expense 919 843
-------- --------
Net Income $ 1,411 $ 1,211
======= ========
Net Income per share basic $ .17 $ .15
======= ========
Net Income per share diluted $ .16 $ .14
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
MEDICAL ACTION INDUSTRIES INC
Statement of Cash Flows
(dollars in thousands)
(Unaudited)
Nine Months Ended
December 31,
1998 1997
------- -------
OPERATING ACTIVITIES
Net Income $ 1,411 $ 1,211
Adjustments to reconcile net income
to net cash provided by operating activities:
Loss from sale of property and equipment -- 61
Depreciation and amortization 678 570
Provision for doubtful accounts 20 21
Deferred compensation 97 91
Changes in operating assets and liabilities:
Accounts receivable (707) (407)
Inventories 1,349 753
Prepaid expenses and other current assets ( 17) (159)
Other assets 7 ( 26)
Accounts payable (418) (416)
Income taxes payable 146 112
Accrued expenses, payroll and payroll taxes 281 667
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,847 2,478
------- -------
INVESTING ACTIVITIES
Purchase price and related acquisition costs -- (40)
Purchase of property, plant and equipment (439) (5,540)
Proceeds from sale of property and equipment -- 1,336
Loan to officers (228) (52)
------- -------
NET CASH (USED IN) INVESTING ACTIVITIES (667) (4,296)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings 2,320 8,484
Principal payments on revolving line of credit,
long-term debt, and capital lease obligations (4,519) (5,977)
Proceeds from exercise of employee stock options 294 140
------- -------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (1,905) 2,647
------- -------
INCREASE IN CASH 275 829
Cash at beginning of year 275 275
------- -------
Cash at end of period $ 550 $ 1,104
======= =======
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
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
adjustment (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
month periods ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the year ended March 31, 1999. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report for the year ended March 31, 1998.
Note 2. INVENTORIES
Inventories, which are stated at the lower of cost (first-in, first-out) or
market, consist of the following:
December 31, March 31,
1998 1998
------------ ---------
(Unaudited)
(in thousands of dollars)
Finished Goods $ 5,134 $ 5,781
Work in Process 67 0
Raw Materials 7,027 7,796
------- -------
Total $12,228 $13,577
======= =======
Note 3. NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earning 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 option, 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 where necessary, restated to
conform to the Statement 128 requirements. The following table sets forth the
computation of basic and diluted earnings per share for the three and nine
months ended December 31,1998 and for the three and nine months ended December
31, 1997.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Dollars in thousands except
per share data
Numerator:
Net income for basic
and dilutive earnings
per share $502 $433 $1,411 $1,211
==== ==== ====== ======
Denominator:
Denominator for basic
earnings per share -
weighted average shares 8,533,664 8,216,836 8,439,916 8,178,779
--------- --------- --------- ----------
Effect of dilutive securities:
Employee stock options 369,855 720,620 492,316 633,090
Non-vested restricted stock 31,875 88,750 52,967 90,465
Warrants 17,909 33,839 24,838 28,197
----------- ----------- ----------- -----------
Dilutive potential common shares 419,639 843,209 570,121 751,752
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares 8,953,303 9,060,045 9,010,037 8,930,531
========= ========= ========= =========
Basic earnings per share $.06 $.05 $.17 $.15
==== ==== ==== ====
Diluted earnings per share $.06 $.05 $.16 $.14
==== ==== ==== ====
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-Looking Statement
This report on Form 10-Q contains forward-looking statements as defined by
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance and financial
results of the Company. The forward-looking statements related to (i) the
expansion of the Company's market share, (ii) the Company's growth into new
markets, (iii) the development of new products and product lines to appeal to
the needs of the Company's customers, (iv) the procurement of export visas for
raw materials for operating room towels from China, which may impact the
availability and pricing of operating room towels, and (v) the retention of the
Company's earnings for use in the operation and expansion of the Company's
business.
Important factors and risks that could cause actual results to differ materially
from those referred to in the forward-looking statements include, but are not
limited to, the effect of economic and market conditions, the impact of the
consolidation throughout the healthcare supply chain, the impact of healthcare
reform, opportunities for acquisitions and the Company's ability to effectively
integrate acquired companies, the ability of the Company to maintain its gross
profit margins, the ability to obtain additional financing to expand the
Company's business, the failure of the Company to successfully compete with the
Company's competitors that have greater financial resources, the loss of key
management personnel or the inability of the Company to attract and retain
qualified personnel, the availability and possible increases in raw material
prices for operating room towels, the impact of current or pending legislation
and regulation, as well as the risks described from time to time in the
Company's filings with the Securities and Exchange Commission, which include
this report on Form 10-Q and the Company's annual report on Form 10-K for the
year ended March 31, 1998.
The forward-looking statements are based on current expectations and involve a
number of known and unknown risks and uncertainties that could cause the actual
results, performance and/or achievements of the company to differ materially
from any future results, performance or achievements, express or implied, by the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, and that in light of the significant
uncertainties inherent in forward-looking statements, the inclusion of such
statements should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.
10
<PAGE>
Results of Operations
Nine months ended December 31, 1998 compared to nine months ended December 31,
1997
Net sales for the nine months ended December 31, 1998 increased 6% to
$43,308,000 from $40,777,000 for the nine months ended December 31, 1997. The
increase in net sales was primarily attributable to a $1,372,000, or 28%,
increase in net sales of the SBW product line which includes net sales from
Dayhill Corp., acquired in October 1997; a $368,000, or 17%, increase in net
sales of gauze sponges, a $366,000, or 10%, increase in net sales of the
QuanTech product line and a $304,000, or 724%, increase in net sales of the
Company's sponge counter bag product line. Management believes that the increase
in net sales of the SBW product line, gauze sponges, the QuanTech product line
and the sponge counter bag product line was primarily due to greater domestic
market penetration.
The Company presently obtains substantially all of its raw materials for
operating room towels from China. These operating room towels are designated as
a textile, for which an export visa is required. The export visas could
adversely impact the availability and pricing of operating room towels. In order
to reduce the effects of the quota restrictions, the Company has accelerated its
procurement of operating room towels from China. Management presently
anticipates that it will be able to meet the Company's requirements of operating
room towels through fiscal 1999, however, the Company has incurred higher
pricing for such raw materials since the fourth quarter of fiscal 1998 due to
the availability of export visas.
Gross profit for the nine months ended December 31, 1998 increased 9% to
$10,031,000 from $9,212,000 for the nine months ended December 31, 1997. Gross
profits as a percentage of net sales for the nine months ended December 31, 1998
remained at 23% of net sales when compared to the nine months ended December 31,
1997. The increase in gross profit dollars was primarily attributable to the
increase in net sales and increased manufacturing efficiencies which were
partially offset by the aforementioned increases in certain raw material costs.
Selling, general and administrative expenses for the nine months ended December
31, 1998 increased 13% to $7,244,000 from $6,419,000 for the nine months ended
December 31, 1997. As a percentage of net sales, selling, general and
administrative expenses increased to 17% for the nine months ended December 31,
1998 from 16% for the nine months ended December 31, 1997. The increase in
selling, general and administrative expense dollars and as a percentage of net
sales was primarily attributable to increased selling expenses associated with
increased sales volume.
11
<PAGE>
Restructuring charges of $273,000 were incurred for the nine months ended
December 31, 1997 as a result of the Company's consolidation of its previous
manufacturing facility and two leased warehouse facilities into the new Arden
facility. The consolidation was completed during the fourth quarter of fiscal
1998.
Interest expense for the nine months ended December 31, 1998 decreased 2% to
$457,000 from $466,000 for the nine months ended December 31, 1997.
Net income for the nine months ended December 31, 1998 increased to $1,411,000
from $1,211,000 for the nine months ended December 31, 1997. The increase in net
income is attributable to the aforementioned increase in net sales and gross
profits and the non-reoccurrence of restructuring charges, which were partially
offset by an increase in selling, general and administrative expenses.
Three months ended December 31, 1998 compared to three months ended December 31,
1997
Net sales for the three months ended December 31, 1998 increased 5% to
$14,667,000 from $14,024,000 for the three months ended December 31, 1997. The
increase in net sales was primarily attributed to a $383,000, or 22%, increase
in net sales of the SBW product line, which includes net sales from Dayhill
Corp., acquired in October 1997; a $98,000, or 2%, increase in net sales of
operating room towels, a $96,000, or 320%, increase in net sales of the sponge
counter bag product line; and a $81,000, or 7%, increase in the QuanTech product
line. Management believes that the increase in net sales of the SBW product
line, gauze sponges, sponge counter bag product line and the QuanTech product
line was primarily due to greater domestic market penetration.
The Company presently obtains substantially all of its raw materials for
operating room towels from China. These operating room towels are designated as
a textile, for which an export visa is required. The export visas could
adversely impact the availability and pricing of operating room towels. In order
to reduce the effects of the quota restrictions, the Company has accelerated its
procurement of operating room towels from China. Management presently
anticipates that it will be able to meet the Company's requirements of operating
room towels through fiscal 1999, however, the Company has incurred higher
pricing for such raw materials since the fourth quarter of fiscal 1998 due to
the availability of export visas.
12
<PAGE>
Gross profit for the three months ended December 31, 1998 increased 9% to
$3,449,000 from $3,171,000 for the three months ended December 31, 1997. Gross
profit as a percentage of net sales for the three months ended December 31, 1998
increased to 24% from 23% of net sales when compared to the three months ended
December 31, 1997. The increase in gross profit dollars and percentage was
primarily attributable to the increase in net sales and increased manufacturing
efficiencies which were partially offset by the aforementioned increases in
certain raw material costs.
Selling, general and administrative expenses for the three months ended December
31, 1998 increased 8% to $2,482,000 from $2,294,000 for the three months ended
December 31, 1997. As a percentage of net sales, selling, general and
administrative expenses increased to 17% for the three months ended December 31,
1998 from 16% for the three months ended December 31, 1997. The increase in
selling, general and administrative expense dollars and as a percentage of net
sales was primarily attributable to increased selling expenses associated with
increased sales volume.
Interest expense for the three months ended December 31, 1998 decreased 8% to
$132,000 from $143,000 for the three months ended December 31, 1997.
Net income for the three months ended December 31, 1998 increased to $502,000
from $433,000 for the three months ended December 31, 1997. The increase in net
income is attributable to the aforementioned increase in net sales and gross
profits and the reduction of interest expense, which were partially offset by an
increase in selling, general and administrative expenses.
Liquidity and Capital Resources
The Company had working capital of $12,527,000 with a current ratio of 2.6 at
December 31, 1998 as compared to working capital of $10,988,000 with a current
ratio of 2.1 on March 31, 1998. Total bank borrowings outstanding, including
Industrial Revenue Bonds of $5,410,000, were $10,772,000 with a debt to equity
ratio of .62 at December 31, 1998 as compared to $12,923,000 with a debt to
equity ratio of .83 at March 31, 1998. The decrease in total borrowings
outstanding at December 31, 1998 was primarily attributable to the net cash
provided by operating activities and the reduction of inventory.
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.
13
<PAGE>
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 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 or at 1-1/4% over the prevailing bankers acceptance rate. At
December 31, 1998, $5,362,000 was outstanding under the credit facility. Changes
in the prime interest rate during fiscal 1999 will have a positive or negative
effect on the Company's interest expense. Each 1% fluctuation in the prime
interest rate will increase or decrease interest expense for the Company by
approximately $54,000 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 December 31, 1998, $5,410,000 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 3.7%. Each 1%
fluctuation in interest rates will increase or decrease interest expense on the
Bonds by approximately $54,000 on an annualized basis.
A significant portion of the Company's operations consists of purchasing certain
raw materials from China. The Company's financial results, therefore, could be
significantly 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.
14
<PAGE>
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 its property is subject.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. (a) Exhibits
None
(b) Reports on Form 8-K
None
15
<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.
Dated: February 1, 1999 By: /s/ Richard G. Satin
------------------------------
Richard G. Satin, Vice President
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 550
<SECURITIES> 0
<RECEIVABLES> 7,244
<ALLOWANCES> 137
<INVENTORY> 12,228
<CURRENT-ASSETS> 20,345
<PP&E> 12,176
<DEPRECIATION> 4,351
<TOTAL-ASSETS> 31,416
<CURRENT-LIABILITIES> 7,818
<BONDS> 0
<COMMON> 9
0
0
<OTHER-SE> 17,477
<TOTAL-LIABILITY-AND-EQUITY> 31,416
<SALES> 43,308
<TOTAL-REVENUES> 43,308
<CGS> 33,277
<TOTAL-COSTS> 40,521
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 457
<INCOME-PRETAX> 2,330
<INCOME-TAX> 919
<INCOME-CONTINUING> 1,411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,411
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
