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 SEPTEMBER 30, 2004
COMMISSION FILE NUMBER 0-13251
MEDICAL ACTION INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)
| DELAWARE | 11-2421849 | |
| (State or other Jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
800 Prime Place, Hauppauge, New York 11788
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code:
(631) 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 126-b of the Exchange Act). 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. 10,255,536 shares of common stock as of October 29, 2004.
CONTENTS
| Page No. | ||||
| PART I- |
FINANCIAL INFORMATION |
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| Item 1. |
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| Balance Sheets at September 30, 2004 (Unaudited) and March 31, 2004 |
3-4 | |||
| Statements of Earnings for the Three Months ended September 30, 2004 and 2003 (Unaudited) |
5 | |||
| Statements of Earnings for the Six Months ended September 30, 2004 and 2003 (Unaudited) |
6 | |||
| Statements of Cash Flows for the Six Months ended September 30, 2004 and 2003 (Unaudited) |
7 | |||
| 8-12 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13-21 | ||
| Item 3. |
21 | |||
| Item 4. |
22 | |||
| PART II - |
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2
MEDICAL ACTION INDUSTRIES INC.
Balance Sheets
(dollars in thousands)
ASSETS
| September 30, 2004 |
March 31, 2004 | |||||
| (Unaudited) | ||||||
| CURRENT ASSETS: |
||||||
| Cash |
$ | 545 | $ | 545 | ||
| Accounts receivable, less allowance for doubtful accounts of $343 at September 30, 2004 and $295 at March 31, 2004 |
10,910 | 10,670 | ||||
| Inventories, net |
18,179 | 18,616 | ||||
| Prepaid expenses |
728 | 551 | ||||
| Deferred income taxes |
308 | 308 | ||||
| Prepaid income taxes |
— | 234 | ||||
| Other current assets |
104 | 142 | ||||
| TOTAL CURRENT ASSETS: |
30,774 | 31,066 | ||||
| Property, plant and equipment, net |
13,015 | 13,654 | ||||
| Due from officers |
— | 92 | ||||
| Goodwill |
37,085 | 37,085 | ||||
| Trademarks |
666 | 666 | ||||
| Other intangible assets, net |
2,079 | 2,213 | ||||
| Other assets |
414 | 521 | ||||
| TOTAL ASSETS: |
$ | 84,033 | $ | 85,297 | ||
The accompanying notes are an integral part of these financial statements.
3
Item 1.
MEDICAL ACTION INDUSTRIES INC.
Balance Sheets
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
| September 30, 2004 |
March 31, 2004 | |||||
| (Unaudited) | ||||||
| CURRENT LIABILITIES: |
||||||
| Accounts payable |
$ | 4,871 | $ | 5,828 | ||
| Accrued expenses, payroll and payroll taxes |
3,154 | 2,445 | ||||
| Accrued income taxes |
603 | — | ||||
| Current portion of long-term debt |
4,360 | 5,360 | ||||
| TOTAL CURRENT LIABILITIES: |
12,988 | 13,633 | ||||
| Deferred income taxes |
3,137 | 3,137 | ||||
| Long-term debt, less current portion |
4,705 | 11,720 | ||||
| TOTAL LIABILITIES: |
20,830 | 28,490 | ||||
| COMMITMENTS |
||||||
| SHAREHOLDERS’ EQUITY: |
||||||
| Common stock 15,000,000 shares authorized, $.001 par value; issued and outstanding 10,255,536 shares at September 30, 2004 and 10,194,036 shares at March 31, 2004 |
10 | 10 | ||||
| Additional paid-in capital, net |
17,681 | 16,415 | ||||
| Retained earnings |
45,512 | 40,382 | ||||
| TOTAL SHAREHOLDERS’ EQUITY: |
63,203 | 56,807 | ||||
| TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY: |
$ | 84,033 | $ | 85,297 | ||
The accompanying notes are an integral part of these financial statements.
4
Item 1.
MEDICAL ACTION INDUSTRIES INC.
Statements of Earnings
(dollars in thousands except per share data)
(Unaudited)
| Three Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Net sales |
$ | 35,146 | $ | 32,356 | ||||
| Cost of sales |
26,126 | 23,875 | ||||||
| Gross profit |
9,020 | 8,481 | ||||||
| Selling, general and administrative expenses |
4,697 | 4,396 | ||||||
| Interest expense |
78 | 252 | ||||||
| Interest income |
(2 | ) | (17 | ) | ||||
| Income before income taxes |
4,247 | 3,850 | ||||||
| Income tax expense |
1,586 | 1,474 | ||||||
| Net income |
$ | 2,661 | $ | 2,376 | ||||
| Net income per share basic |
$ | .26 | $ | .24 | ||||
| Net income per share diluted |
$ | .26 | $ | .23 | ||||
The accompanying notes are an integral part of these financial statements.
5
Item 1.
MEDICAL ACTION INDUSTRIES INC.
Statements of Earnings
(dollars in thousands except per share data)
(Unaudited)
| Six Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Net sales |
$ | 68,467 | $ | 62,977 | ||||
| Cost of sales |
50,657 | 46,351 | ||||||
| Gross profit |
17,810 | 16,626 | ||||||
| Selling, general and administrative expenses |
9,440 | 8,765 | ||||||
| Interest expense |
193 | 574 | ||||||
| Interest income |
(8 | ) | (35 | ) | ||||
| Income before income taxes |
8,185 | 7,322 | ||||||
| Income tax expense |
3,055 | 2,762 | ||||||
| Net income |
$ | 5,130 | $ | 4,560 | ||||
| Net income per share basic |
$ | .50 | $ | .46 | ||||
| Net income per share diluted |
$ | .49 | $ | .45 | ||||
The accompanying notes are an integral part of these financial statements.
6
Item 1.
MEDICAL ACTION INDUSTRIES INC.
Statements of Cash Flows
(dollars in thousands)
(Unaudited)
| Six Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| OPERATING ACTIVITIES |
||||||||
| Net income |
$ | 5,130 | $ | 4,560 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
1,156 | 1,130 | ||||||
| Provision for doubtful accounts |
48 | 30 | ||||||
| Provision for impairment of property, plant and equipment |
75 | — | ||||||
| Loss (gain) on sale of property and equipment |
36 | (9 | ) | |||||
| Tax benefit from exercise of options |
145 | 910 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(288 | ) | (490 | ) | ||||
| Inventories |
437 | 999 | ||||||
| Prepaid expense and other current assets |
(139 | ) | (261 | ) | ||||
| Other assets |
(100 | ) | (4 | ) | ||||
| Accounts payable |
(957 | ) | (808 | ) | ||||
| Income taxes payable |
837 | 408 | ||||||
| Accrued expenses, payroll and payroll taxes |
709 | 533 | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES |
7,089 | 6,998 | ||||||
| INVESTING ACTIVITIES |
||||||||
| Purchase of property, plant and equipment |
(306 | ) | (274 | ) | ||||
| Proceeds from sale of property and equipment |
20 | 75 | ||||||
| Repayment of loans to officers |
428 | — | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
142 | (199 | ) | |||||
| FINANCING ACTIVITIES |
||||||||
| Proceeds from revolving line of credit and long term borrowings |
15,700 | 11,675 | ||||||
| Principal payments on revolving line of credit and long term debt |
(23,715 | ) | (19,500 | ) | ||||
| Proceeds from exercise of employee stock options |
784 | 703 | ||||||
| NET CASH USED IN FINANCING ACTIVITIES |
(7,231 | ) | (7,122 | ) | ||||
| Decrease in cash |
— | (323 | ) | |||||
| Cash at beginning of year |
545 | 892 | ||||||
| Cash at end of period |
$ | 545 | $ | 569 | ||||
The accompanying notes are an integral part of these financial statements
7
Item 1.
MEDICAL ACTION INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) 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 US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six (6) month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended March 31, 2005. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report for the year ended March 31, 2004.
STOCK COMPENSATION
In accordance with the provisions of SFAS No. 123, the Company has elected to apply APB 25 and related interpretations in accounting for its employee and director stock-based awards. All employee and director stock-based awards were granted with an exercise price equal to the fair market value of the Company’s common stock 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 expensed based on the fair value of the employee and director 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:
| Three Months Ended September 30, |
Six Months Ended September 30, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||
| (dollars in thousands except per share data) | ||||||||||||
| Net income – as reported |
$ | 2,661 | $ | 2,376 | $ | 5,130 | $ | 4,560 | ||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method from all awards, net of related tax effects |
222 | 350 | 483 | 565 | ||||||||
| Net income – pro forma |
$ | 2,439 | $ | 2,026 | $ | 4,647 | $ | 3,995 | ||||
| Earnings per share – as reported: |
||||||||||||
| Basic |
$ | .26 | $ | .24 | $ | .50 | $ | .46 | ||||
| Diluted |
.26 | .23 | .49 | .45 | ||||||||
| Earnings per share – pro forma |
||||||||||||
| Basic |
$ | .24 | $ | .20 | $ | .45 | $ | .40 | ||||
| Diluted |
.23 | .20 | .45 | .40 | ||||||||
8
Note 2. INVENTORIES
Inventories, which are stated at the lower of cost (first-in, first-out) or market, consist of the following:
| September 30, 2004 |
March 31, 2004 | |||||
| (Unaudited) | ||||||
| (in thousands of dollars) | ||||||
| Finished Goods |
$ | 9,521 | $ | 9,753 | ||
| Work in Process |
95 | — | ||||
| Raw Materials |
8,563 | 8,863 | ||||
| Total |
$ | 18,179 | $ | 18,616 | ||
Note 3. NET INCOME PER SHARE
Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common shares. 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 prices during the periods. Excluded from the calculation of earnings per share are options and warrants to purchase 138,500 and 20,000 shares for the three (3) and six (6) months ended
9
Item 1.
Note 3. (continued)