<PAGE>
Company Profile
Headquartered in Hauppauge, New York, Medical Action Industries Inc. develops,
manufactures, markets and distributes a variety of disposable, surgical related
products. The Company's products are marketed primarily to acute care facilities
in domestic and certain international markets. Further, the Company is expanding
its target market to include physician, dental and veterinary offices. Medical
Action is the leading manufacturer and distributor of sterile laparotomy
sponges and sterile operating room towels in the United States. The Company's
products are marketed through an extensive network of independent distributors,
direct sales personnel and manufacturers' representatives. Medical Action has
preferred vendor agreements with national distributors, as well as sole source
and/or committed contracts with nearly every major group purchasing alliance.
The Company also manufactures its products under private label contracts to
other distributors and medical suppliers. Medical Action's manufacturing,
packaging and warehousing activities are conducted in its Arden, North Carolina
facility.
<PAGE>
Selected
Financial Data
<TABLE>
<CAPTION>
Year ended March 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings Data
Net Sales $70,951,533 $57,500,109 $54,640,129 $46,000,309 $38,846,290
Income before income taxes 5,284,900 3,167,424 2,756,096 1,642,572 1,204,310
Net income 3,238,062 1,915,437 1,684,243 971,347 710,743
Net income per common share:
Basic .36 .23 .21 .12 .09
Diluted .35 .21 .19 .12 .09
---------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets $39,154,448 $40,152,793 $31,880,894 $24,993,552 $24,390,336
Working capital (1) 16,785,870 14,194,637 11,108,552 10,228,286 10,334,499
Long-term debt including capital leases
(less current portion) 11,329,668 13,210,729 6,142,900 3,558,674 4,387,958
Shareholders' equity (2) 21,751,373 17,896,379 15,535,456 13,417,942 12,273,367
---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Management's Discussion and Analysis of Financial Condition and Results
of Operations
(2) There were no cash dividends declared in any of the periods presented above.
<PAGE>
To our Shareholders,
Customers,
Healthcare Partners
and Teammates
[PLEASE SUPPLY DESCRIPTION OF GRAPHIC]
Fiscal 2000 was an exciting and rewarding year for Medical Action Industries
Inc. We continued to follow our well-defined strategy -- diversify our breadth
of product offerings, seek new markets for our existing products, manage our
expenditures and our use of capital efficiently and grow through strategic
acquisitions. This strategy has proven to be both durable and successful. The
year just ended was the best in our history, and there is every reason to
believe the years to come will build further on our accomplishments to date.
As we discussed last year, we are committed to building Medical Action into
a diversified, global medical device manufacturer. We are pleased to report that
in fiscal 2000, we took several significant steps in attaining that objective.
New programs and strategic relationships were developed with hospital purchasing
alliances and distributors, sales to Johnson & Johnson Medical in Latin America
exceeded expectations, we successfully integrated the medical products division
of Acme United Corporation ("Acme Healthcare"), acquired in March 1999, into our
manufacturing facility in Arden, North Carolina, and generated record revenues
and reported the highest net income in the Company's history. These
accomplishments will provide even greater opportunities for growth and
profitability in the future.
We are making use of intangible resources that are every bit as significant
as our strengths. These resources include our strategic alliances throughout the
healthcare supply
...it's our business philosophy.
1
<PAGE>
chain, our brand image and reputation, and the knowledge and productivity of our
employees. It is extremely gratifying to report that Medical Action recorded
almost $71,000,000 in revenue, with less than 300 employees in fiscal 2000. We
have created a great team of employees. They are talented, knowledgeable, highly
motivated and customer oriented. Our employees are diverse and entrepreneurial.
We encourage their ideas and foster their development. We understand the benefit
of management ownership and incentives, but we also believe in another kind of
ownership, which is even more powerful. It is ownership of work product,
justifiable pride of performance and being on a winning team. It is this kind of
ownership, fostered by a management system built on responsibility and
accountability, that is the real driving force behind the success of Medical
Action.
The successful execution of our strategy in fiscal 2000 produced our best
financial performance ever. Net sales increased 23% to a record $70,952,000,
compared with $57,500,000 in fiscal 1999. Net income for the year rose 69% to a
record $3,238,000, compared with $1,915,000 one year ago. Earnings per basic
share increased to a record $.36 from $.23 and earnings per diluted share
increased to a record $.35 from $.21.
[Bar Chart]
NET INCOME
$Millions
96 .711
97 .971
98 1.684
99 1.915
00 3.238
"You can expect us to lead Medical Action in enhancing long-term value for
shareholders by investing in product development and cost control efficiencies,
expanding into international markets, and making strategic and synergistic
acquisitions."
[PLEASE SUPPLY DESCRIPTION OF GRAPHIC]
During fiscal 2000, we also achieved our goal of strengthening our balance
sheet as shareholders' equity increased to $21,751,000 or $2.36 per outstanding
share and our working capital increased to $16,786,000 from $14,195,000 in
fiscal 1999. Earnings before interest, taxes, depreciation and amortization
("EBITDA") reached $7,678,000, a 54% increase from fiscal 1999 and a more than
ten-fold increase in the past five (5) years. This strong cash flow allows us to
internally fund acquisitions, develop new products and increase our return to
shareholders. We maintain a keen eye towards maximizing shareholder return
through a unique combination of cost control and programmed growth. Medical
Action's financial philosophy is based on a simple commitment of increasing
shareholder value. We are proud of our success and growth, but we are determined
that we will not just grow for the sake of growth. Our strategic focus will
continue to be on increasing return on equity and maintaining the product
superiority and balance that have brought us so much success.
As an industry leader and low-cost manufacturer, we seek to build upon our
core business by continuing to provide unsurpassed service to customers. The
Company has invested heavily into building financial capital and human resources
necessary to achieve these goals.
During the past year, we successfully integrated the acquisition of Acme
Healthcare, the Company's largest acquisition to date, which significantly
broadened our breadth of products as well as provided enormous opportunities for
growth in other markets, including the physician, dental and alternate site
markets. Acme Healthcare is one of the first companies
2
<PAGE>
to design and sell disposable instrument kits and trays, and 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 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.
[Please supply description of graphic]
As we go forward, we'll continue to look at acquisitions that meet our
criteria of being good fits strategically and make sense financially.
Geographically, we would also like to expand in certain parts of Europe and
Asia-Pacific. While acquisitions get a lot of attention, organic growth is just
as important. We have both organic growth and acquisition related growth.
We believe that progress was made this past year in our communication with
shareholders, associates and the investment community. While we accept the
challenge for improvement, it is extremely important to understand that we are
totally committed to expanding the shareholder value of Medical Action. We
intend to embark on a number of programs designed to increase the awareness of
our strategies and opportunities, as well as to maximize the return from your
investment in our shares.
With the healthcare system in the United States changing so rapidly,
financial stability, adaptability and the ability to react quickly will be
fundamental to our success. Industry dynamics, including increasing
consolidation of manufacturers, distributors, hospitals and group purchasing
organizations ("GPOs"), together with the cost pressures of a managed care
environment, are providing greater incentives to reducing the number of
duplicate vendors for product lines distributed to hospitals and healthcare
facilities. Intense competition in the healthcare industry winnows out companies
that don't deliver sufficient value. Quality, service, innovations, its people
and its relationships with customers, combine to make Medical Action a leader in
the markets it serves. The realistic scenario means opportunity for resourceful
companies. Medical Action's goal is to continue building lasting, personal,
value-oriented relationships with customers by maintaining product quality and
by being responsive to customer needs.
Medical Action, because of our preferred vendor status, is strategically
positioned to benefit from increased volume as other, less efficient vendors are
eliminated. At the same time, there are tough regulatory standards for the
medical device industry that present formidable barriers to entry for new
competitors. Medical Action's mission is simple -- to be the supplier of choice
throughout the healthcare supply chain. As customers become more selective in
choosing their suppliers, they increasingly require us to adhere to the highest
quality standards.
[Bar Chart]
NET SALES
$Millions
96 38.846
97 46.000
98 54.640
99 57.500
00 70.952
3
<PAGE>
By remaining focused on being the supplier of choice throughout the
healthcare supply chain, we have achieved preferred vendor status with firms
that ship more than 80% of the products distributed to the hospital market. Our
national accounts team continues to focus on the emerging external influences on
hospital purchasing decisions, namely GPOs and distributors. By leveraging our
domestic market share, low-cost supplier position and leadership in supply chain
excellence, Medical Action's portfolio of sole source and/or committed contracts
with GPOs is both extensive and complete.
[PLEASE SUPPLY DESCRIPTION OF GRAPHIC]
Medical Action, as a market leader, will continue to focus on providing
innovative solutions to meet our customers' needs. Our reputation for quality is
excellent and we are a low-cost provider in an industry driven by economies of
scale. Our service capabilities are flexible and extensive. Also, Medical
Action's strong capital position and operating cash flow will readily sustain
our growth momentum. We have made significant progress in fiscal 2000 to insure
that we are poised to meet the changing needs of customers, leveraging our
product capabilities, product breadth and distribution channels.
We are pleased with our strategies and performance, and we are confident
that we have the drive and discipline to do even better. We have a strong
balance sheet, an enviable portfolio of healthcare alliances, highly motivated
and talented employees and a vision that embraces change. We will continue to
build upon strengths, expand our global presence and invest in the competencies
we need to maintain our momentum.
It is never easy, and the economics of our industry presents many
challenges, but Medical Action has in place the most important asset to get the
job done: dedicated employees committed to long-term success. Together, we look
to the future with enthusiasm and confidence. Our success can only be built with
the support of our customers, teammates, healthcare partners, investors and
suppliers. We appreciate the role each of you plays, and look forward to
continuing our partnership with you.
/s/ Paul D. Meringolo
Paul D. Meringolo
Chairman of the Board,
Chief Executive Officer and President
[Bar Chart]
SHAREHOLDERS' EQUITY
$Millions
96 12.273
97 13.417
98 15.535
99 17.896
00 21.751
4
<PAGE>
Management's Discussion
and Analysis of
Financial Condition
The following management's discussion and analysis describes material changes in
the results of operations of Medical Action Industries Inc. ("Medical Action" or
the "Company") during each of the three years ended March 31, 2000 and the
Company's financial condition at that date. Trends of a material nature are
discussed to the extent known and considered relevant.
Certain statements in this discussion 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 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 Securities and Exchange
Commission, which includes its Annual Report on Form 10-K and Quarterly Reports
on Form 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
actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, expressed or
implied, by the 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 periodically any forward-looking
statement, whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales for the fiscal year ended March 31, 2000 increased 23% to
$70,952,000 from $57,500,000 for the fiscal year ended March 31, 1999. The
increase in net sales was primarily attributable to a $9,744,000 increase in net
sales of the Acme product line acquired on March 22, 1999; a $2,834,000 or 16%
increase in net sales of operating room towels and a $534,000 or 3% increase in
net sales of laparotomy sponges. Management believes that the increase in net
sales of laparotomy sponges was primarily due to increased penetration of
international markets and the increase in the net sales of operating room towels
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 and pricing 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 2001 without an adverse effect on pricing.
Gross profit increased $5,025,000 or 38% to $18,309,000 for the fiscal year
ended March 31, 2000 as compared to $13,284,000 for the prior fiscal year. Gross
profit as a percentage of sales for the fiscal year ended March 31, 2000
increased to 26% as compared to 23% for the prior fiscal year. The increase in
gross profit dollars and percentage for the fiscal year ended March 31, 2000 was
due to increased sales volume, increased manufacturing efficiencies at the
Company's manufacturing facility in North Carolina and a decrease in raw
material costs.
Selling, general and administrative expenses increased by $2,662,000 to
$12,203,000 for the fiscal year ended March 31, 2000 from $9,541,000 for the
prior fiscal year. As a percentage of net sales, selling, general and
administrative expenses remained at 17% as compared to the prior fiscal year.
The increase in selling, general and administrative expense dollars was
primarily attributable to increased selling expenses associated with achieving
higher net sales and due to increased expense associated with the integration of
the Acme acquisition.
Interest expense, net increased 43% to $822,000 or 1% of net sales from
$576,000 or 1% of net sales for the fiscal years ended March 31, 2000 and March
31, 1999, respectively. The increase in interest expense was attributable to an
increase in the
5
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF
FINANCIAL CONDITION (CONT.)
average principal loan balances outstanding during the fiscal year ended March
31, 2000 as compared to the fiscal year ended March 31, 1999. The increase in
principal loan balances outstanding during the year was primarily attributable
to net cash used to purchase the Acme product line on March 22, 1999.
Net income for the fiscal year ended March 31, 2000 was $3,238,000 or $.36
per basic share and $.35 per diluted share as compared to $1,915,000 or $.23 per
basic and $.21 per diluted share for the fiscal year ended March 31, 1999. The
increase in net income was attributable to the increase in net sales and gross
profits, which were partially offset by an increase in selling, general and
administrative expenses and interest expense.
Fiscal 1999 Compared to Fiscal 1998
Net sales for the fiscal year ended March 31, 1999 increased 5% to
$57,500,000 from $54,640,000 for the fiscal year ended March 31, 1998. The
increase in net sales was primarily attributable to a $1,283,000 or 19% increase
in net sales of the SBW product line which includes a full year of net sales
from Dayhill Corporation, acquired in October 1997; a $585,000 or 18% increase
in net sales of gauze sponges and a $465,000 or 10% increase in net sales of the
QuanTech product line. Management believes that the increase in net sales 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 increased $918,000 or 7%, to $13,284,000 for the fiscal year
ended March 31, 1999 as compared to $12,366,000 for the prior fiscal year. Gross
profit as a percentage of sales for the fiscal year ended March 31, 1999
remained at 23% as compared to the prior fiscal year. The increase in gross
profit dollars for the fiscal year ended March 31, 1999 was due to increased
sales volume and increased manufacturing efficiencies at the Company's
manufacturing facility in North Carolina which were partially offset by
increased raw material costs.
Selling, general and administrative expenses increased by $795,000 to
$9,541,000 for the fiscal year ended March 31, 1999 from $8,746,000 for the
prior fiscal year. As a percentage of net sales, selling, general and
administrative expenses increased to 17% as compared to 16% the prior fiscal
year. The increase in selling, general and administrative expense dollars and as
a percentage of sales was primarily attributable to increased selling expenses
associated with achieving higher net sales. Restructuring charges of $260,000
were incurred for the fiscal year ended March 31, 1999 as a result of the
Company's consolidation and sale of its Asheville, North Carolina manufacturing
facility and two leased warehouse facilities into a newly acquired facility in
Arden, North Carolina.
Interest expense, net decreased 5% from $603,000 or 1% of net sales to
$576,000 or 1% of net sales for the fiscal years ended March 31, 1998 and March
31, 1999, respectively. The decrease in interest expense was attributable to a
decrease in the average principal loan balances outstanding during the fiscal
year ended March 31, 1999 as compared to the fiscal year ended March 31, 1998.
The decrease in principal loan balances outstanding during the year was
primarily attributable to net cash provided from operating activities during
fiscal 1999.
Net income for the fiscal year ended March 31, 1999 was $1,915,000, or $.23
per basic share and $.21 per diluted share as compared to $1,684,000, or $.21
per basic and $.19 per diluted share, for the fiscal year ended March 31, 1998.
The increase in net income was attributable to the increase in net sales and
gross profits, the non-reoccurrence of restructuring charges and the decrease in
interest expense, which were partially offset by an increase in selling, general
and administrative expenses.
Liquidity and Capital Resources
Current assets have decreased $453,000 to $22,291,000 at March 31, 2000
from $22,744,000 at March 31, 1999. The decrease was primarily attributable to a
$2,051,000 decrease in inventory, which was partially offset by a $1,674,000
increase in accounts receivable. The decrease in inventory was attributed to
better inventory management and the increase in accounts receivable was
attributed to increased sales. The Company had working capital of $16,786,000
with a current ratio of 4.05 at March 31, 2000 as compared to working capital of
$14,195,000 with a current ratio of 2.66 at March 31, 1999. Total borrowings
outstanding were $12,355,000 with a debt to equity ratio of .57 at March 31,
2000 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 year-end is primarily due
to net cash provided by operating activities.
On March 18, 1999, the Company signed a Loan Agreement and Revolving Credit
Note with its existing bank. The Agreement, which expires on March 31, 2003,
contains a borrowing limit of $20,000,000. The Credit Agreement bears interest
at either the
6
<PAGE>
prime-lending rate or at the libor rate plus applicable margins. Long-term funds
available under this Agreement amounted to $11,676,000 at March 31, 2000 as
defined in the borrowing base formula. The loan amount is collateralized by all
of the assets of the Company and contains certain restrictive covenants, which
among other matters, impose limitations with respect to the incurrence of liens,
payment of dividends, guarantees, mergers, acquisitions, capital expenditures
and specified sales of assets. At March 31, 2000, the Company was in compliance
with all such covenants and financial ratios.
The Company has financed its operations primarily through cash flow from
operations and borrowings from its existing credit facilities. At March 31,
2000, the Company had a cash balance of $602,000 as compared to $672,000 at
March 31, 1999. The Company's operating activities provided cash of $6,710,000
and $4,079,000 for the years ended March 31, 2000 and 1999, respectively. Net
cash provided during the year ended March 31, 2000 consisted primarily of net
income from operations, depreciation and amortization, decreases in inventories,
and increases in accounts payable and accrued expenses. These sources of cash
were partially offset by an increase in accounts receivable.
Investing activities used net cash of $865,000 and $8,299,000 during the
years ended March 31, 2000 and 1999, respectively. The principal uses during the
year ended March 31, 2000 were for purchases of property and equipment of
$819,000 and loans to officers of $100,000.
Financing activities used cash of $5,915,000 and provided cash of
$4,616,000 during the years ended March 31, 2000 and 1999, respectively.
Financing activities during the year ended March 31, 2000 used cash primarily
for net principal payments on its existing credit facilities, capital lease
obligations and other notes payable of $6,192,000.
At March 31, 2000, the Company had the following material commitments for
capital expenditures. On February 28, 2000, the Company entered into a contract
to purchase approximately 1.4 acres of land located in Hauppauge, New York and
an existing 12,000 square foot building located thereon (the "Hauppauge
Facility"). The purchase price for the Hauppauge Facility is $1,054,400, which
upon the signing of the contract, the Company paid $50,000 as a down payment.
The balance is to be paid at Closing, which is scheduled on or before December
1, 2000. The Company has also entered into an agreement for building
improvements and office construction on the Hauppauge Facility for approximately
$261,000. A deposit of $81,550 was made for this agreement in February 2000. The
Hauppauge Facility will replace the current leased facility in Hauppauge, New
York as the Company's corporate headquarters. The deposit made for the Hauppauge
Facility was financed from funds from its existing credit facility. It is
expected that the purchase of the Hauppauge Facility will be financed with bank
indebtedness.
The Company believes that the anticipated future cash flow from operations,
coupled with its cash on hand and available funds under its revolving credit
agreement, will be sufficient to meet its working capital requirements for
fiscal 2000. Management believes that it will be able to meet the anticipated
demand for operating room towels in fiscal 2001.
The Company has successfully completed its program to prepare systems and
applications for the year 2000. The costs associated with this program did not
have a material effect on its financial position and have been incurred.
The Company believes that the relatively moderate rates of inflation in
2000 and 1999 have not had a significant impact on sales and profitability.
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 March 31, 2000, $7,395,000 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 $74,000 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 March 31, 2000, $4,960,000 was outstanding for
these Bonds. The Bonds bear interest at a variable rate determined weekly.
During fiscal 2000, the interest rate on the Bonds approximated 3.6%. Each 1%
fluctuation in interest rates will increase or decrease interest expense on the
Bonds by approximately $50,000 on an annualized basis.
A significant portion of the Company's raw materials are purchased from
India and China. 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.
7
<PAGE>
Balance Sheets
MEDICAL ACTION INDUSTRIES INC.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
March 31, 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................................... $601,871 $672,116
Accounts receivable, less allowance for doubtful accounts of $157,000 at
March 31, 2000 and $129,000 at March 31, 1999 .............................. 7,739,406 6,065,886
Inventories .................................................................. 13,451,089 15,501,826
Prepaid expenses ............................................................. 238,599 299,653
Deferred income taxes ........................................................ 116,857 117,786
Other current assets ......................................................... 143,506 87,198
---------------------------------------------------------------------------------------------------------------------------
Total current assets ........................................................... 22,291,328 22,744,465
Property and equipment, net .................................................... 8,425,334 8,370,448
Due from officers .............................................................. 383,051 283,206
Intangibles, less accumulated amortization of
$1,111,448 at March 31, 2000 and $657,448 at March 31, 1999 ................ 7,628,736 8,205,328
Other assets ................................................................... 425,999 549,346
---------------------------------------------------------------------------------------------------------------------------
Total assets ................................................................... $39,154,448 $40,152,793
---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $2,879,039 $1,880,212
Accrued expenses ............................................................. 1,342,542 1,087,593
Current portion of capital lease obligations ................................. 173,877 162,455
Current portion of long-term debt ............................................ 1,110,000 360,000
Notes payable to bank ........................................................ - 4,059,568
Other note payable ........................................................... - 1,000,000
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities ...................................................... 5,505,458 8,549,828
Deferred income taxes .......................................................... 567,949 495,857
Capital lease obligations, less current portion ................................ 84,668 250,729
Long-term debt, less current portion ........................................... 11,245,000 12,960,000
---------------------------------------------------------------------------------------------------------------------------
............................................................................... 17,403,075 22,256,414
---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, $.001 par value:
none issued at March 31, 2000 and 1999 ......................................... - -
Common stock, 15,000,000 shares authorized, $.001 par value:
issued 9,198,022 shares at March 31, 2000 and 8,574,289 shares
at March 31, 1999 .......................................................... 9,198 8,574
Additional paid-in capital, net ................................................ 9,673,501 9,057,193
Retained earnings .............................................................. 12,068,674 8,830,612
---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity ..................................................... 21,751,373 17,896,379
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ..................................... $39,154,448 $40,152,793
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
Statements of Earnings
MEDICAL ACTION INDUSTRIES INC.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales ................................................ $70,951,533 $57,500,109 $54,640,129
Cost of Sales ............................................ 52,642,270 44,216,462 42,274,066
---------------------------------------------------------------------------------------------------------------------------
Gross Profit ............................................. 18,309,263 13,283,647 12,366,063
---------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses ............. 12,202,514 9,540,639 8,746,190
Interest expense, net .................................... 821,849 575,584 603,330
Restructuring charges .................................... - - 260,447
---------------------------------------------------------------------------------------------------------------------------
......................................................... 13,024,363 10,116,223 9,609,967
---------------------------------------------------------------------------------------------------------------------------
Income before taxes ...................................... 5,284,900 3,167,424 2,756,096
Income tax expense ....................................... 2,046,838 1,251,987 1,071,853
---------------------------------------------------------------------------------------------------------------------------
Net income ............................................... $3,238,062 $1,915,437 $1,684,243
---------------------------------------------------------------------------------------------------------------------------
Net income per common share
Basic ............................................... $.36 $.23 $.21
Diluted ............................................. $.35 $.21 $.19
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
Statement of Shareholders' Equity
MEDICAL ACTION INDUSTRIES INC.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Total
Common Stock Additional Deferred Retained Shareholders'
Shares Amount Paid-In Capital Compensation Earnings Equity
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997 ................. 8,230,289 8,230 8,474,905 (296,125) 5,230,932 13,417,942
Issuance of common stock:
Pursuant to Stock Incentive Plan ....... 20,000 20 46,390 (46,390) 20
On exercise of stock options, net ...... 161,375 161 161,998 162,159
Amortization of deferred compensation .... 120,968 120,968
Cancellation on bonus stock issued
under Restricted Management Stock
Bonus Plan ............................... (10,625) (10) (24,052) 24,052 (10)
Tax benefit from vesting of stock
under Restricted Management Stock
Bonus Plan and exercise of
options ................................ 150,134 150,134
Net income ............................... 1,684,243 1,684,243
---------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 ................ 8,401,039 8,401 8,809,375 (197,495) 6,915,175 15,535,456
Issuance of common stock:
On exercise of stock options, net ...... 174,500 174 148,191 148,365
Amortization of deferred compensation .... 128,592 128,592
Fair value of warrants granted for
Acme acquisition ......................... 73,500 73,500
Cancellation of bonus stock issued
under Restricted Management Stock
Bonus Plan ............................... (1,250) (1) (3,124) 3,127 2
Tax benefit from vesting of stock under
Restricted Management Stock Bonus Plan
and exercise of options ................ 95,027 95,027
Net income ............................... 1,915,437 1,915,437
---------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 ................ 8,574,289 8,574 9,122,969 (65,776) 8,830,612 17,896,379
Issuance of common stock:
On exercise of stock options and
warrants, net .......................... 623,733 624 276,116 276,740
Amortization of deferred compensation .... 65,776 65,776
Tax benefit from vesting of stock under
Restricted Management Stock Bonus Plan,
exercise of Warrants and options ....... 274,416 274,416
Net income ............................... 3,238,062 3,238,062
---------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 ................ 9,198,022 $9,198 $9,673,501 - $12,068,674 $21,751,373
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
Statement of Cash Flows
MEDICAL ACTION INDUSTRIES INC.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $3,238,062 $1,915,437 $1,684,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 1,318,272 912,025 778,329
Provision for doubtful accounts ......................... 28,000 27,000 28,000
Deferred income taxes ................................... 73,021 22,871 (31,113)
Deferred compensation ................................... 65,776 128,592 120,968
Loss on sale of property and equipment .................. - - 60,808
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable .................................... (1,701,520) 327,222 (80,501)
Inventories ............................................ 2,014,154 259,317 (2,302,162)
Prepaid expenses, other current assets and other
receivables .......................................... 87,960 80,597 47,683
Other assets ........................................... 36,347 (92,900) (22,801)
Accounts payable ....................................... 1,103,827 333,964 (488,158)
Accrued income taxes ................................... 191,202 - 160,116
Accrued expenses, payroll and taxes .................... 254,949 164,990 459,756
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ................... 6,710,050 4,079,115 415,168
---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase price and related acquisition costs ................ 54,175 (7,287,467) (302,765)
Purchases of property and equipment ......................... (819,314) (782,934) (5,699,382)
Proceeds from sale of property, plant and equipment ......... - - 1,335,797
Loans to officers - net ..................................... (99,845) (228,168) (61,288)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ....................... (864,984) (8,298,569) (4,727,638)
---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from revolving line of credit,
term loan and long-term borrowings .......................... 7,346,920 11,811,137 12,039,116
Principal payments on revolving line of credit,
long-term debt, other note payable and
capital lease obligations ................................. (13,538,971) (7,500,750) (7,932,588)
Proceeds from exercise of employee stock options ............ 276,740 305,867 205,919
---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities ......... (5,915,311) 4,616,254 4,312,447
---------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash ................................. (70,245) 396,800 (23)
Cash at beginning of year ................................... 672,116 275,316 275,339
---------------------------------------------------------------------------------------------------------------------------
Cash at end of year ......................................... $601,871 $672,116 $275,316
---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid ............................................. $945,384 $695,505 $786,572
---------------------------------------------------------------------------------------------------------------------------
Income taxes paid ........................................... $1,782,549 $1,182,681 $942,850
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
--------------------------------------------------------------------------------
Notes To Financial Statements
MEDICAL ACTION INDUSTRIES INC. o MARCH 31, 2000
--------------------------------------------------------------------------------
Note 1 --
Significant
Accounting
Policies
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Leases meeting the criteria
for capitalization are recorded at the present value of future lease payments.
Maintenance and repairs are charged to operations as incurred and expenditures
for major improvements are capitalized. The carrying amount and related
accumulated depreciation of assets sold or otherwise disposed of are removed
from the accounts and any resulting gain or loss is reflected in operations in
the year of disposal. Depreciation of property and equipment is provided on a
straight-line basis over the estimated useful lives of the related assets
(buildings-40 years; factory equipment-10 to 20 years; fixtures and other
equipment-3 to 5 years). Accelerated methods of depreciation are used for tax
purposes. Amortization of leasehold improvements is provided on the
straight-line method over the period of their economic or related lease lives,
whichever is less.
REVENUE RECOGNITION
The Company recognizes income (sales) as products are shipped and title
passes to customers.
CONCENTRATION OF CREDIT RISK
The Company manufactures and distributes disposable medical products
principally to medical product distributors, hospital buying groups and
hospitals located throughout the United States. The Company performs credit
evaluations of its customers' financial condition and does not require
collateral. Receivables are generally due within 60-90 days. Credit losses
relating to customers have historically been minimal and within management's
expectations. (See Note 14 for major customers.)
USE OF ESTIMATES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with Financial Accounting Standards No. 107. "Disclosures About Fair Value of
Financial Instruments." Management of the Company believes that the fair value
of financial instruments, consisting of cash, accounts receivable, accounts
payable, notes payable and debt, approximate carrying value due to the immediate
or short-term maturity associated with its cash, accounts receivable and
accounts payable, notes payable and the interest rates associated with its debt.
CURRENCY
All of the Company's sales and purchases were transacted in U.S.
dollars.
EARNINGS PER SHARE INFORMATION
Basic earnings per share is based on the weighted average number of
common shares outstanding without consideration of potential common stock.
Diluted earnings per share is based on the weighted average number of common and
potential common shares outstanding. The calculation takes into account the
shares that may be issued upon exercise of stock options, reduced by the shares
that may be repurchased with the funds received from the exercise, based on the
average price during the year. Excluded from the calculation of earnings per
share are options and warrants to purchase 72,500, 543,500 and 70,000 shares in
fiscal 2000, 1999 and 1998 respectively, as their inclusion would not have been
dilutive. Note 11 displays a table showing the computation of basic and diluted
earnings per share.
RECLASSIFICATIONS
The Company has reclassified certain prior year information to conform
to the current year's presentation.
STOCK COMPENSATION
The Company measures compensation plans using the intrinsic value
method and as provided in Note 12 pro forma disclosures of the effect on net
income and earnings per share as if the fair value-based method had been applied
in measuring compensation expense.
INTANGIBLES
Intangibles, consisting primarily of goodwill and trademarks, represent
the excess of the aggregate price paid by the Company over the fair market value
of the tangible assets acquired in business acquisitions accounted for as a
purchase. Goodwill and other identifiable intangible assets are amortized on a
straight-line basis from 10 to 20 years.
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles (including the excess of cost over fair value of net
assets acquired and property and equipment) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. The Company has not identified any such
impairment losses.
12
<PAGE>
--------------------------------------------------------------------------------
NOTE 2 --
Inventories
--------------------------------------------------------------------------------
Inventories consist of the following:
--------------------------------------------------------------------
March 31, 2000 1999
--------------------------------------------------------------------
Finished goods $5,343,873 $6,740,436
Raw materials 8,107,216 8,761,390
--------------------------------------------------------------------
Total $13,451,089 $15,501,826
--------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 3 --
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 $8,475,967 of which
$7,475,967 was paid at or prior to closing, with the balance paid over the three
(3) month period ending 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 acquired
amounted to $5,386,179 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 $2,147,363
Factory and Office Equipment 336,250
Trademarks 447,000
Goodwill 5,386,179
--------------------------------------------------------------------
$8,316,792
--------------------------------------------------------------------
On January 7, 1998, the Company acquired certain assets relating to the
sponge counter product lines of Sage Products, Inc. ("Sage"). The purchase price
for the acquired assets was $300,000 in cash, (which was paid at closing). The
assets acquired included customer lists, patent and trademarks, and the
equipment used in connection with or required for the manufacture of the Sage
Product Line. The acquisition has been accounted for as a purchase and the
operations relating to the product lines acquired from Sage 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 assets acquired amounted to
$216,498 and is being amortized over ten (10) years.
On October 30, 1997, the Company acquired certain assets of the
specialty medical packaging and collection systems for the containment and
transport of biohazardous waste business of Dayhill Corporation ("Dayhill"). The
purchase price for the acquired assets consisted of the assumption of
approximately $593,000 of Dayhill's liabilities. The acquisition has been
accounted for as a purchase and the operations of Dayhill 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 assets acquired amounted to
$20,964 and is being amortized over ten (10) years.
--------------------------------------------------------------------------------
NOTE 4 --
Property and
Equipment
Property and equipment (including those arising from capital leases)
are summarized as follows:
------------------------------------------------------------------------
March 31, 2000 1999
------------------------------------------------------------------------
Land and building $5,098,056 $4,923,099
Factory and equipment 6,693,808 6,605,989
Furniture and fixtures 769,893 515,508
Leasehold improvements 57,115 57,115
Capital leases-equipment 785,303 772,459
Automobiles and trucks 6,820 6,820
13,410,995 12,880,990
Less accumulated depreciation
and amortization 4,985,661 4,510,542
------------------------------------------------------------------------
$8,425,334 $8,370,448
------------------------------------------------------------------------
Depreciation expense amounted to $777,272 and $665,025 in the fiscal
years ended March 31, 2000 and 1999 respectively.
--------------------------------------------------------------------------------
NOTE 5 --
Related Party
Transactions
At various times during fiscal 2000, the Company made loans to certain
officers, which totaled $884,445 bringing the cumulative total to $1,368,901 at
March 31, 2000 from $484,456 at March 31, 1999.
13
<PAGE>
--------------------------------------------------------------------------------
NOTE 5 --
Related Party
Transactions
(cont.)
The loans are classified as non-current assets except for the portions,
which involve the purchase of the Company's common stock. The amounts involving
the purchase of the Company's common stock were $784,600 and $157,500 during the
fiscal years ended March 31, 2000 and March 31, 1999, respectively, bringing the
aggregate amount to $985,850 and $201,250 at March 31, 2000 and March 31, 1999,
respectively, which have been deducted from Shareholders' equity. Certain loans,
which relate to the exercise of stock options, aggregating approximately
$883,000, bear interest at 7% and are due June 2004. The balance of the loans,
which are non-interest bearing, are payable on demand, however, the Company does
not presently anticipate demanding repayment.
In October 1997, the Company entered into a Consulting Agreement with
the Company's former Chief Executive Officer and Chairman of the Board. The
Consulting Agreement provides for an annual fee of $275,000, payable in equal
monthly installments, for the ten (10) year period ending December 31, 2007. The
consulting services to be provided to the Company include, but are not limited
to, the evaluation of the progress of the Company's business development,
analysis of the Company's financial condition and proposed operations and the
projected financial results thereof. In addition, the Consulting Agreement
provides that the Company's former Chief Executive Officer will not, either
directly or indirectly, engage in any business competitive to that being carried
on by the Company.
--------------------------------------------------------------------------------
NOTE 6 --
Income Taxes
Income tax expense (benefit) consists of the following:
-------------------------------------------------------------------------
March 31, 2000 1999 1998
-------------------------------------------------------------------------
Current:
Federal $1,704,232 $1,057,160 $960,492
State 269,585 171,956 142,474
Deferred 73,021 22,871 (31,113)
-------------------------------------------------------------------------
$2,046,838 $1,251,987 $1,071,853
-------------------------------------------------------------------------
The following table indicates the significant elements contributing to
the difference between the statutory federal tax rate and the Company's
effective tax rate for 2000, 1999 and 1998:
------------------------------------------------------------------------
March 31, 2000 1999 1998
------------------------------------------------------------------------
Statutory rate 34.0% 34.0% 34.0%
State taxes 3.5 3.4 3.4
Nondeductible expenses 1.2 1.8 2.0
Other - .3 (0.5)
------------------------------------------------------------------------
Effective tax rate 38.7% 39.5% 38.9%
------------------------------------------------------------------------
The components of deferred tax assets and deferred tax liabilities at
March 31, 2000 and 1999 are as follows:
-------------------------------------------------------------------------
March 31, 2000 1999
-------------------------------------------------------------------------
Deferred tax assets
Inventory valuation allowance $57,198 $68,767
Allowance for doubtful accounts 59,659 49,019
-------------------------------------------------------------------------
Total deferred tax assets 116,857 117,786
-------------------------------------------------------------------------
Deferred tax liabilities
Depreciation and amortization $567,949 $495,857
-------------------------------------------------------------------------
Management has determined that, based on the history of taxable
earnings and its expectations for the future, taxable income will more likely
than not be sufficient to fully realize deferred tax assets and, accordingly,
has not reduced deferred tax assets by a valuation allowance.
--------------------------------------------------------------------------------
NOTE 7 --
Leases
The Company leases various warehouse and office space under
noncancelable operating leases expiring at various times through fiscal 2001.
The Company also leases certain equipment and vehicles under noncancelable
capital and operating leases expiring in various years through fiscal 2004.
The following is a schedule of future minimum payments, by year and in
the aggregate, under capital leases and noncancelable operating leases with
initial or remaining terms of one year or more at March 31, 2000:
-----------------------------------------------------------------------
Capital Operating
Leases Leases
-----------------------------------------------------------------------
Year ended March 31,
2001 189,945 61,501
2002 85,355 53,895
2003 1,902 15,691
2004 - 5,687
-----------------------------------------------------------------------
Total minimum lease payments 277,202 136,774
Amounts representing interest 18,657
-----------------------------------------------------------------------
Present value of net minimum lease payments
($173,877 of which is current) 258,545
-----------------------------------------------------------------------
Equipment acquired under capital leases was $13,765 in fiscal 2000.
Rental expense under operating leases was $286,091, $254,162 and $472,978 for
the fiscal years ended March 31, 2000, 1999 and 1998 respectively.
14
<PAGE>
--------------------------------------------------------------------------------
NOTE 8 --
Long-term Debt
March 31, 2000 1999
-----------------------------------------------------------------------
Revolving credit agreement (a) $1,395,000 $2,000,000
Term loan (a) 6,000,000 6,000,000
Industrial Revenue Bonds (b) 4,960,000 5,320,000
-----------------------------------------------------------------------
12,355,000 $13,320,000
Less current portion 1,110,000 360,000
-----------------------------------------------------------------------
$11,245,000 $12,960,000
-----------------------------------------------------------------------
(a) On March 18, 1999, the Company signed a Loan Agreement and
Revolving Credit Note with its existing bank. This agreement, which expires on
March 31, 2003, replaces the Fourth Amended and Restated Revolving Credit Note
and Agreement with the same bank. The credit agreement provides for a borrowing
of $20,000,000 and is divided into two types of borrowing facilities (i) a term
loan with a principal amount of up to six million ($6,000,000) dollars and (ii)
revolving credit loans, which amounts may be borrowed, repaid and reborrowed up
to $14,000,000. Interest on the term loan (7.57% at March 31, 2000) shall equal
the prime rate plus the prime applicable margin if any or at the Company's
option at the adjusted libor rate plus the libor applicable margin. The margin's
range from prime rate to prime rate plus 1/4% for prime rate loans and libor
plus 1 1/2% to libor plus 2 1/2% for libor rate loans. The rate is determined
quarterly based on agreed upon financial ratios. Interest on revolving credit
loans (7.98% at March 31, 2000) shall equal the prime rate or at the Company's
option at the libor rate plus the applicable margin. The libor margin ranges
from libor plus 1 1/2% to libor plus 2 1/4%. The rates are determined quarterly
based on agreed upon financial ratios. The revolving credit agreement also has
sublimits of $8,500,000 of banker's acceptances, which bear interest at 1 1/4%
over the prevailing banker's acceptances rate, and a $4,000,000 sublimit for
letters of credit. Banker's acceptances at March 31, 2000 and 1999 in the amount
of $0 and $4,060,000 respectively, have been classified as notes payable. The
weighted average interest rate in such short term borrowings outstanding was
7.25% at March 31, 1999. The term loan is payable in twenty-three (23) quarterly
principal installments of $250,000, commencing on July 1, 2000 and continuing
quarterly thereafter until April 1, 2006, when any remaining principal amount
shall be due and payable. In the event that the Company generates excess cash
flow as defined in the agreement, the Company will make a cash flow recapture
payment on the term loan. Borrowings on the revolving credit agreement is
further limited to 80% of eligible accounts receivable, as defined, and 55% of
eligible inventory, as defined, with a sublimit of $9,000,000. Borrowings under
this agreement are collateralized by all the assets of the Company, and the
agreement contains certain restrictive covenants, which among other matters,
impose limitations with respect to the incurrence of liens, guarantees, mergers,
acquisitions, capital expenditures, specified sales of assets and prohibits the
payment of dividends. The Company is also required to maintain various financial
ratios with which it is in compliance at March 31, 2000.
(b) On July 9, 1997 the Company acquired approximately 32 acres of land
located in Arden, North Carolina and an existing 205,000 square foot building
located thereon (the "Arden Facility"). The purchase price for the Arden
Facility was $2,900,000, which was paid at closing. The acquisition of the Arden
Facility was financed with the proceeds from the Issuance and sale by The
Buncombe County Industrial Facilities and Pollution Control Financing Authority
of its $5,500,000 Industrial Development Revenue Bonds (Medical Action
Industries Inc. Project), Series 1997 (the "Bonds"). Interest on the Bonds is
payable on the first business day of each January, April, July and October
commencing October, 1997 and ending July, 2013. Principal payments are due and
payable in 60 consecutive quarterly installments of $90,000 commencing October
1, 1998 and ending July 1, 2013 with a final maturity payment of $190,000. The
Bonds bear interest at a variable rate, determined weekly. The interest rate on
the Bonds at March 31, 2000 was 4.1% per annum. In connection with the issuance
of the Bonds, the Company entered into a Letter of Credit and Reimbursement
Agreement dated as of July 1, 1997 with a bank for approximately $5,800,000 (the
"Reimbursement Agreement") to support principal and interest payments of the
Bonds and requires payment of an annual fee of .85% of the remaining balance.
The Company also entered into a Remarketing Agreement, pursuant to which the
Remarketing Agent will use its best efforts to arrange for a sale in the
secondary market of such Bonds. The Remarketing Agreement provides for the
payment of an annual fee of .125% of the remaining balance.
As of March 31, 1998 the Company has used all of the $5,500,000
proceeds from the Bonds for the purchase and rehabilitation of the Arden
Facility and for the acquisition of machinery and equipment.
Maturities of long-term debt are as follows at March 31, 2000:
------------------------------------------------------------------------
2001 ............................................. 1,110,000
2002 ............................................. 1,360,000
2003 ............................................. 2,755,000
2004 ............................................. 1,360,000
2005 ............................................. 1,360,000
Thereafter ....................................... 4,410,000
------------------------------------------------------------------------
12,355,000
------------------------------------------------------------------------
15
<PAGE>
--------------------------------------------------------------------------------
NOTE 9 --
Other Note Payable
In connection with the acquisition of Acme (see Note 3), the Company
signed a note in the amount of $1,000,000. The note is payable providing that
Acme is in compliance with the terms of the production and transition schedule
as set forth in the Transition Plan, as amended. If Acme is timely in meeting
the transition schedule, payments will be made as follows: (i) $200,000 on April
15, 1999; (ii) $400,000 on May 15, 1999 and $400,000 with the transfer of the
final piece of equipment which is anticipated to be on or about June 15, 1999.
The Company has made all of the scheduled payments of $1,000,000 and has paid
the note in full.
--------------------------------------------------------------------------------
NOTE 10 --
Restructuring
Charges
As a result of the Company's consolidation of its Asheville
manufacturing facility and two leased warehouse facilities into the new Arden
Facility, which was completed in the fourth quarter of fiscal 1998, the Company
has recorded $260,447 of pre-tax restructuring charges. The restructuring
charges include lease termination fees, net loss on the sale of the
manufacturing facility in Asheville, North Carolina, and costs incurred for
moving inventory and equipment to the recently acquired Arden Facility. As of
March 31, 1998, all expenses have been incurred pertaining to the above
mentioned charges.
--------------------------------------------------------------------------------
NOTE 11 --
Earnings Per
Share
-------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------
Numerator:
Net income for basic and
diluted earnings per share $3,238,062 $1,915,437 $1,684,243
-------------------------------------------------------------------------
Denominator:
Denominator for basic
earnings per share -
weighted average shares 9,007,934 8,465,770 8,201,585
Effect of dilutive securities:
Employee stock options 332,875 453,370 642,557
Non-vested restricted stock 3,777 47,381 89,731
Warrants 14,129 23,377 29,654
-------------------------------------------------------------------------
Dilutive potential common shares 350,781 523,128 761,942
Denominator for diluted earnings
per share - adjusted
weighted average shares 9,358,715 8,988,898 8,963,527
-------------------------------------------------------------------------
Basic earnings per share $.36 $.23 $.21
-------------------------------------------------------------------------
Diluted earnings per share $.35 $.21 $.19
-------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 12 --
Shareholders'
Equity and
Stock Plans
In 1984, the Company's Board of Directors and stockholders approved a
Restricted Management Stock Bonus Plan (the "Bonus Plan"). Under the Bonus Plan,
which expired in May 1994, 500,000 shares of the Company's common stock may be
sold to executives and other key salaried employees at par value ($.001 per
share). Shares issued under the Bonus Plan vest in four equal installments on
the second, third, fourth and fifth anniversaries of the date of issuance.
Except for those shares, which have vested, shares issued under the Bonus Plan
may not be sold, transferred or otherwise disposed of unless they are first
offered to the Company at par value. At March 31, 2000, 477,688 shares had been
issued and have fully vested.
During fiscal 1990, the Company's Board of Directors and stockholders
approved a Non-Qualified Stock Option Plan (the "Non-Qualified Option Plan").
The Non-Qualified Option Plan, as amended, authorizes the granting to employees
of the Company options to purchase an aggregate of 2,150,000 shares of the
Company's common stock. The options are granted at the fair market price or at a
value that is not less than 85% of the fair market value on the date of grant.
The options are exercisable in two equal installments on the first and second
anniversary of the date of grant. Options expire from five to ten years from the
date of grant unless the employment is terminated, in which event, subject to
certain exceptions, the options terminate two months subsequent to date of
termination. At March 31, 2000 there were 340,375 shares available for granting
of future options. The number of shares exercisable at March 31 2000, 1999 and
1998 were 411,250, 517,000 and 423,500, respectively.
In 1994, the Company's Board of Directors and stockholders approved the
1994 Stock Incentive plan (the "Incentive Plan"), which, as amended, covers
850,000 shares of the Company's common stock. The Incentive Plan, which expires
in 2004, permits the granting of incentive stock options, shares of restricted
stock and non-qualified stock options. All officers and key employees of the
Company and its affiliates are eligible to participate in the Incentive Plan.
The Incentive Plan is administered by the Stock Option Committee of the Board of
Directors, which determines the persons to whom, and the times at which awards
will be granted. In addition, the Stock Option Committee decides the type of
awards to be granted and all other related terms and conditions of the awards.
The per share exercise price of any option may not be less than the fair market
value of a share of common stock at the time of grant. Grants outstanding at
March 31, 2000 vest in two equal installments on the first and second
anniversary of the date of grant. Future grants may have different vesting
schedules. At March 31, 2000, there were 10,000 shares available for future
grants. At March 31, 2000, 30,000 shares of restricted
16
<PAGE>
--------------------------------------------------------------------------------
NOTE 12 --
Shareholders'
Equity and
Stock Plans
(cont.)
stock are outstanding, which have all vested. Furthermore, the number of
non-qualified options exercisable at March 31, 2000, 1999, and 1998 were
380,000, 512,500 and 372,500 respectively. No incentive options have been issued
under this plan.
The Company's 1996 Non-Employee Director Stock Option Plan (the
"Director Plan") was approved by the stockholders in August 1996 and covers
100,000 shares of the Company's common stock. Under the terms of the Director
Plan, each non-employee director of the Company will be granted each year an
option to purchase 2,500 shares of the Company's common stock. The authorization
for grants under the Director Plan will expire after the annual meeting in 2006.
The Company believes that the Director Plan will encourage stock ownership by
non-employee directors, thus benefiting stockholders by giving such directors a
proprietary interest in the Company. Also, the Director Plan will enhance the
Company's ability to attract, retain and suitably reward directors of
exceptional ability, upon whose leadership and management skills the Company's
future rests in large part. At March 31, 2000 there were 77,500 shares available
for granting of future options. All of the shares granted were exercisable at
March 31, 2000.
Pursuant to the Acme acquisition (see note 3), the Company approved the
issuance of a ten-year warrant to purchase the Company's common stock. The
warrant, which expires on March 22, 2009, permits Acme to purchase 50,000 shares
of common stock at $2.84 per share.
Pursuant to an employment agreement expiring in August 1998, the Board
of Directors approved the issuance of a five-year warrant to purchase the
Company's common stock to the former principal stockholder of QuanTech, Inc. The
warrants to purchase 80,592 shares of common stock at $2.1875 per share, the
market value on the date of grant, were exercised using cashless exercise
pursuant to which 30,233 shares of the Company's common stock were issued.
Pursuant to an employment agreement expiring in October 2000, the Board of
Directors approved the issuance of a five-year warrant to purchase the Company's
common stock to a former principal stockholder of Dayhill Corporation. The
warrant, which expires on October 30, 2002, permits the holder to purchase
70,000 shares of common stock at $3.94 per share, the market value on the date
of grant.
In accordance with the provisions of SFAS No. 123, the Company has
elected to apply APB 25 and related interpretations in accounting for its
stock-based awards because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123 requires use of option valuation
models that were not developed for use in valuing such stock-based awards. For
the years ended March 31, 2000, 1999, and 1998, all stock-based awards were
granted with an exercise price equal to the fair market value on their date of
grant. Therefore, under the provisions of APB 25, no compensation expense has
been recognized with respect to such awards. If the Company had elected to
recognize compensation expense based on the fair value of the stock-based awards
granted at grant date as prescribed by SFAS No. 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated in the table
below :
-------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------
Net income-as reported $3,238,062 $1,915,437 $1,684,243
Net income-pro forma 2,939,695 1,469,023 1,342,724
Earnings per share-as reported:
Basic $.36 $.23 $.21
Diluted .35 .21 .19
Earnings per share-pro forma
Basic .33 .17 .16
-------------------------------------------------------------------------
Diluted .31 .16 .15
-------------------------------------------------------------------------
Option activity under the option plans during the three years ended
March 31, 2000 is summarized as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1996 Non Employee Weighted
Non-Qualified Option Plan 1994 Stock Incentive Plan Directors Stock Option Plan Average
Number of Option Price Per Number of Option Price Number of Option Price Option Price
Shares Share Shares Per Share Shares Per Share Per Share
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 880,750 $ .97 - $2.50 475,000 $.97 - $2.38 - - $1.71
------------------------------------------------------------------------------------------------------------------------------------
Granted 303,000 $2.09 - $3.25 75,000 $3.25 7,500 $3.00 2.82
Exercised (186,375) $.97 - $2.19 - - - - 1.57
Cancelled (147,875) $.97 - $3.00 - - - - 1.75
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 849,500 $.97 - $3.25 550,000 $.97 - $2.38 7,500 $3.00 $2.02
------------------------------------------------------------------------------------------------------------------------------------
Granted 184,000 $2.69 - $3.88 260,000 $2.63 - $3.38 7,500 $3.25 $3.18
Exercised (174,500) $.97 - $2.38 - - - - 1.75
Cancelled (59,000) $3.00 - $3.38 - - - - 3.28
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 800,000 $.97 - $3.88 810,000 $.97 - $3.38 15,000 $3.00 - $3.25 $2.32
------------------------------------------------------------------------------------------------------------------------------------
Granted 203,500 $2.63 - $3.00 - - 7,500 $3.13 $2.87
Exercised (293,500) $.97 - $3.50 (300,000) $.97 - $2.38 - - 1.79
Cancelled (60,000) $2.88 - $3.50 - - - - 3.24
------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 650,000 $.97 - $3.88 510,000 $1.88 - $3.38 22,500 $3.00 - $3.25 $2.65
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
--------------------------------------------------------------------------------
NOTE 12--
Shareholders'
Equity and
Stock Plans
(cont.)
The fair value of the Company's stock-based awards is estimated on the date of
grant using the Black-Scholes option-pricing model assuming no expected
dividends and the following weighted average assumptions:
-------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------
Expected stock price volatility .613 .702 .710
Risk-free interest rate 6.09% 5.49% 6.43%
Expected life of options 4 years 4 years 4 years
-------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock-based awards have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The weighted average fair value of stock-based awards granted is $1.51
in fiscal 2000, $1.82 in fiscal 1999 and $1.74 in fiscal 1998. The
weighted-average remaining contractual life of all stock-based awards
outstanding is 3.7 years in fiscal 2000 and 3.2 years in fiscal 1999 and fiscal
1998. The weighted-average exercise price of all stock-based awards exercisable
at March 31, 2000, 1999 and 1998 is $2.49, $1.92 and $1.69, respectively.
--------------------------------------------------------------------------------
NOTE 13 --
Retirement
Plan
Effective April 1, 1988, the Company adopted a retirement plan for all
of its employees pursuant to section 401(k) of the Internal Revenue Code.
Subject to the terms and conditions of the plan, each eligible employee may
contribute up to 15% of his or her compensation as defined therein. In addition,
the Plan provides for a discretionary matching company contribution of 25% of
the employee's contribution up to a maximum of 6% of their compensation. The
Company's contribution vests over a period of four years and amounted to $56,653
in 2000, $47,509 in 1999 and $40,085 in 1998.
--------------------------------------------------------------------------------
NOTE 14 --
Other Matters
(a) The Company operates in one industry, disposable medical products.
(b) 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.
(c) Sales to Owens and Minor Inc., Allegiance Healthcare Corp., and
McKesson General Medical (the "Distributors") accounted for approximately 27%,
24% and 11%, respectively, for the fiscal year ended March 31, 2000, 25%, 25%
and 11% of net sales, respectively, for the fiscal year ended March 31, 1999,
and 24%, 23% and 10%, respectively, for the fiscal year ended March 31, 1998.
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 do not purchase for their own accounts. The Company, therefore,
does not believe it is appropriate to categorize the Distributors as actual
customers.
(d) Product development costs charged to expense were $519,000,
$446,000, and $364,000 for the years ended March 31, 2000, 1999 and 1998,
respectively.
(e) The Company is a party to lawsuits arising out of the conduct of
its ordinary course of business, including those related to product liability
and the sale and distribution of its products, which management believes are
covered by insurance. 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.
18
<PAGE>
Statement of
Management
Responsibility
The financial statements included in this annual report have been
prepared by the management of Medical Action Industries Inc. which has primary
responsibility for the integrity and objectivity of the statements. The
financial statements were prepared in conformity with generally accepted
accounting principles and include, where necessary, certain estimates and
judgments by management deemed appropriate in light of existing circumstances.
Management is also responsible for maintaining a system of internal
accounting controls designed to provide reasonable assurance that transactions
are properly authorized and recorded and the Company's assets are safeguarded
against material loss and unauthorized use or disposal. To accomplish this,
management has developed prescribed policies and procedures encompassing all
facets of the Company's accounting system. These policies and procedures are
continuously monitored by management and are updated or modified as needed.
The fiscal 2000 financial statements of the Company have been audited
by Grant Thornton LLP, independent certified public accountants. Their
accompanying report is based on an audit conducted in accordance with generally
accepted auditing standards. As part of their audit, they perform a review of
internal accounting controls and financial reporting matters for the purpose of
determining the amount of reliance to place on those controls relating to the
audit tests they perform.
The Company's Board of Directors maintains an Audit Committee
consisting of outside directors who meet periodically with management and
separately with the independent auditors to review financial reporting matters
and to discuss issues relating to their audit.
/s/ Paul D. Meringolo, /s/ Richard G. Satin,
Paul D. Meringolo, Richard G. Satin,
Chairman of the Board, Vice President of Operations
Chief Executive Officer and President and General Counsel
19
<PAGE>
Report of Independent
Certified Public Accountants
Stockholders and Board of Directors
Medical Action Industries Inc.
We have audited the accompanying balance sheets of Medical Action
Industries Inc. as of March 31, 2000 and 1999, and the related statements of
earnings, shareholders' equity and cash flows for each of the three years in the
period ended March 31, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Medical Action
Industries Inc. as of March 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended March 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Grant Thornton LLP
Grant Thornton LLP
Melville, N.Y.
May 19, 2000
<PAGE>
BOARD OF DIRECTORS
Paul D. Meringolo
Chairman of the Board,
Chief Executive Officer and President
Richard G. Satin
Vice President of Operations and
General Counsel
Bernard Wengrover
Certified Public Accountant
Dr. Philip F. Corso
Assistant Clinical Professor of Surgery-
Yale University School of Medicine; Senior Attending and Emeritus Chief
of Plastic Surgery Bridgeport and Norwalk Hospitals
Dr. Thomas A. Nicosia
Fellow of the American College of
Cardiology. Affiliated with St. Francis and North Shore University Hospitals
EXECUTIVE OFFICERS
Paul D. Meringolo
Chairman of the Board,
Chief Executive Officer and President
Richard G. Satin
Vice President of Operations and
General Counsel
Daniel F. Marsh
Vice President - Sales and Marketing
Eric Liu
Vice President - International
Operations
OPERATIONS MANAGEMENT
Victor Bacchioni
Corporate Controller
Steve Ferrera
Director of Sales and Marketing -
OEM Division
William C. Gilbert
Vice President - Manufacturing
Howard Laster
National Accounts Manager
Philip R. Meringolo
Director of Information Systems
INDEPENDENT AUDITORS
Grant Thornton LLP
<PAGE>
One Huntington Quadrangle
Melville, New York 11747
REGISTRAR & TRANSFER AGENT
American Stock Transfer and
Trust Company
40 Wall Street
New York, New York 10005
SEC FORM 10-K
If you would like a copy of our Annual Report on SEC Form 10-K for the fiscal
year ended March 31, 2000, you may obtain it without charge. Direct your
request to Medical Action Industries Inc., Corporate Secretary, 150 Motor
Parkway, Hauppauge, New York 11788.
DUPLICATE MAILINGS
When a stockholder owns shares in more than one account or when several
stockholders live at the same address, they may receive multiple copies of
the Annual Report or other mailings. For further information on how to
eliminate multiple mailings, contact American Stock Transfer and Trust
Company at (718) 921-8293.
COMPANY FACILITIES
Executive Offices
150 Motor Parkway
Hauppauge, New York 11788
MANUFACTURING/DISTRIBUTION AND OFFICE FACILITIES
25 Heywood Road
Arden, North Carolina 28704
1938 E. Pomona Street
Santa Ana, California 92705
ANNUAL STOCKHOLDERS' MEETING
The Annual Stockholders' Meeting of Medical Action will be held on Tuesday,
August 15, 2000 at the offices of Medical Action Industries Inc., 150 Motor
Parkway, lower level, Hauppauge, New York. A Form of Proxy and Proxy
Statement is being mailed to stockholders of record with this report.
