10-K 1 file001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ________TO________ COMMISSION FILE NO. 0-13251 MEDICAL ACTION INDUSTRIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 11-2421849 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 800 PRIME PLACE, HAUPPAUGE, NEW YORK 11788 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 231-4600 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.001 PAR VALUE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K [X]. THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY NONAFFILIATES OF THE REGISTRANT AS OF JUNE 20, 2001 WAS APPROXIMATELY $60,000,000. AS OF JUNE 20, 2001, REGISTRANT HAD OUTSTANDING 9,059,900 SHARES OF COMMON STOCK. PARTS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE TO PARTS I, II, III AND IV OF THIS FORM 10-K REPORT: (1) PROXY STATEMENT FOR REGISTRANT'S 2001 ANNUAL MEETING OF STOCKHOLDERS AND (2) REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED MARCH 31, 2001. ================================================================================ PART I ITEM ONE - BUSINESS MEDICAL ACTION INDUSTRIES INC. (THE "COMPANY" OR "MEDICAL ACTION") DEVELOPS, MANUFACTURES, MARKETS AND DISTRIBUTES A VARIETY OF DISPOSABLE SURGICAL RELATED PRODUCTS. MEDICAL ACTION IS A LEADING MANUFACTURER AND DISTRIBUTOR OF STERILE DISPOSABLE LAPAROTOMY SPONGES AND OPERATING ROOM TOWELS IN THE UNITED STATES. THROUGH ITS EXISTING DIRECT SALES FORCE, MANUFACTURERS' REPRESENTATIVES AND INTERNAL SALES DEPARTMENT, THE COMPANY'S PRODUCTS ARE SOLD THROUGHOUT THE UNITED STATES AND CERTAIN INTERNATIONAL MARKETS, AND IS EXPANDING ITS END-USER BASE TO INCLUDE PHYSICIAN, DENTAL AND VETERINARY OFFICES. MEDICAL ACTION HAS ENTERED INTO PREFERRED VENDOR AGREEMENTS WITH NATIONAL DISTRIBUTORS, AS WELL AS SOLE SOURCE AND/OR COMMITTED CONTRACTS WITH NEARLY EVERY MAJOR GROUP PURCHASING ALLIANCE. THE COMPANY INTENDS TO UTILIZE THESE SALES CHANNELS TO EXPAND ITS PRODUCT LINES TO INCLUDE BOTH SURGICAL AND NON-SURGICAL PRODUCTS. DURING THE PAST SEVERAL YEARS, THE COMPANY HAS HAD AN ACTIVE ACQUISITION PROGRAM AND HAS COMPLETED SIX TRANSACTIONS SINCE 1994. IN AUGUST 1994, THE COMPANY ACQUIRED THE DISPOSABLE SURGICAL PRODUCTS BUSINESS OF QUANTECH, INC. THE ACQUIRED QUANTECH PRODUCTS INCLUDE A PROPRIETARY SURGICAL LIGHT HANDLE COVER, UNIQUELY DESIGNED AND PATENTED, WHICH IS USED AS A STERILE BARRIER ON SURGICAL LIGHT HANDLES IN THE OPERATING ROOM. THE QUANTECH LINE ALSO PRODUCES AND MARKETS NEEDLE COUNTERS, INSTRUMENT POUCHES, MAGNETIC INSTRUMENT DRAPES, AND RELATED PRODUCTS USED PRIMARILY IN THE OPERATING ROOM ENVIRONMENT. IN JANUARY 1996, THE COMPANY ACQUIRED CERTAIN ASSETS RELATING TO THE STERILIZATION PACKAGING, MONITORING AND CONTAMINATION CONTROL PRODUCTS BUSINESS OF LAWSON MARDON MEDICAL PRODUCTS, INC. ("LAWSON MARDON" OR "SBW"). THE PRIMARY PRODUCTS ACQUIRED FROM LAWSON MARDON INCLUDE STERILITY PACKAGING, A LINE OF STERILIZATION INDICATORS AND INTEGRATORS AND SUCH ANCILLARY PRODUCTS AS INFECTIOUS WASTE BAGS, LABORATORY SPECIMEN BAGS AND STERILITY MAINTENANCE COVERS. THESE PRODUCTS ARE USED IN HOSPITAL CENTRAL SUPPLY, OPERATING ROOMS AND IN PHYSICIANS' OFFICES. IN OCTOBER 1997, THE COMPANY ACQUIRED SUBSTANTIALLY ALL OF THE ASSETS RELATING TO THE SPECIALTY PACKAGING BUSINESS OF DAYHILL CORPORATION ("DAYHILL"). THE ACQUIRED DAYHILL PRODUCTS PRINCIPALLY CONSIST OF COLLECTION SYSTEMS FOR THE CONTAINMENT AND TRANSPORT OF BIOHAZARDOUS WASTE, INCLUDING BIOHAZARD BAGS, AUTOCLAVE BAGS, LABORATORY TRANSPORT BAGS, ZIP LOCK BAGS AND SPONGE COUNTING BAGS. IN JANUARY 1998, THE COMPANY ACQUIRED THE SPONGE COUNTER PRODUCT LINES OF SAGE PRODUCTS, INC., WHICH INCLUDED A UNIQUELY DESIGNED AND PATENTED SURGICAL SPONGE COUNTING SYSTEM, SAFE-T-COUNT(TM), AS WELL AS A COUNTING SYSTEM KNOWN AS POCKET COUNT(TM). IN MARCH 1999, THE COMPANY ACQUIRED THE MEDICAL PRODUCTS DIVISION OF ACME UNITED CORPORATION. ACME HEALTHCARE, ONE OF THE FIRST COMPANIES TO DESIGN AND SELL DISPOSABLE INSTRUMENT KITS AND TRAYS, IS PRINCIPALLY COMPRISED OF THREE PRODUCT CATEGORIES - (I) KIT AND TRAY PRODUCTS, INCLUDING SUTURE REMOVAL TRAYS, I.V. START KITS, AND CENTRAL LINE TRAYS; (II) NET, PADDING, WOUND CARE AND ANTISEPTIC PRODUCTS, INCLUDING ACU-DYNE(R), AN ANTI-MICROBIAL SOLUTION OF POVIDONE IODINE WHICH COMES IN VARIOUS PACKAGES AND APPLICATORS, AND A LINE OF PROPRIETARY TUBEGAUZE(R) ELASTIC NETTING USED IN DRESSING RETENTION; AND (III) INSTRUMENT PACKS, WHICH INCLUDE A BROAD LINE OF STERILE INSTRUMENTS, SUCH AS HEMOSTATS, SCALPELS, FORCEPS AND NEEDLE HOLDERS. THE COMPANY FOCUSES ITS RESOURCES ON ENTERING NEW MARKETS FOR ITS EXISTING PRODUCT LINES, INCLUDING ALTERNATE CARE, PHYSICIAN, VETERINARY AND DENTAL MARKETS; ACCELERATE THE INTERNAL DEVELOPMENT OF NEW PRODUCTS FOR ITS EXISTING MARKETS AND PURSUIT OF ACQUISITIONS WHICH INCLUDE PRODUCTS THAT COMPLEMENT EXISTING PRODUCT LINES FOR UTILIZATION OF THE COMPANY'S EXTENSIVE SALES AND DISTRIBUTION CHANNELS; THE INTRODUCTION OF ITS PRODUCTS INTO THE INTERNATIONAL MARKETPLACE; AND TO INCREASE PRODUCTIVITY BY MAXIMIZING THE UTILIZATION OF ITS EXISTING FACILITIES. 2 THE PRODUCTS PRESENTLY MANUFACTURED AND/OR MARKETED BY THE COMPANY INCLUDE: DISPOSABLE LAPAROTOMY SPONGES - LAPAROTOMY SPONGES ARE DESIGNED PRIMARILY FOR USE DURING SURGICAL PROCEDURES IN HOSPITALS AND HEALTH FACILITIES. THEY ARE SINGLE USE (DISPOSABLE) AND MADE OF GAUZE AND SOLD IN VARYING SIZES AND UTILIZED FOR A MULTITUDE OF PURPOSES. LAPAROTOMY SPONGES COVER EXPOSED INTERNAL ORGANS, ISOLATING THEM FROM THE PART OF THE BODY BEING OPERATED UPON. THEY ALSO ABSORB BLOOD AND ACT AS A BUFFER BETWEEN MEDICAL INSTRUMENTS AND THE SKIN, THEREBY REDUCING TRAUMA TO SKIN TISSUE CAUSED BY THE MEDICAL INSTRUMENT. LAPAROTOMY SPONGES ARE SOLD IN STERILE PACKAGING OR AS A NON-STERILE COMPONENT TO BE USED WITH OTHER HEALTH CARE COMPANIES' PRODUCTS, PRIMARILY SURGICAL PRE-PACKAGED PROCEDURE TRAYS. THE COMPANY'S LAPAROTOMY SPONGES CONTAIN AN X-RAY DETECTABLE ELEMENT AND LOOP HANDLE IN ORDER TO FACILITATE EASY COUNTING AND IDENTIFICATION IN THE OPERATING ROOM. FOR THE FISCAL YEARS ENDED MARCH 31, 2001, 2000 AND 1999, LAPAROTOMY SPONGES ACCOUNTED FOR 27%, 29% AND 34%, RESPECTIVELY, OF THE COMPANY'S TOTAL SALES. ABSORBENT OPERATING ROOM TOWELS - THE COMPANY'S LINE OF COTTON ABSORBENT OPERATING ROOM TOWELS ARE USED DURING SURGERY FOR DRYING HANDS, ROLLED UP FOR PROPPING INSTRUMENTS, ON BACK TABLES AND MAYO STANDS FOR ABSORBING FLUIDS, AROUND THE INCISION SITE FOR ABSORBING BLOOD AND TO ALLOW THE SURGEON TO CLIP TUBING AND INSTRUMENTS CLOSE TO THE SURGICAL SITE DURING THE SURGICAL PROCEDURE. OPERATING ROOM TOWELS ARE SOLD IN STERILE PACKAGING FOR SINGLE (DISPOSABLE) USE AND AS A NON-STERILE COMPONENT TO BE USED WITH OTHER HEALTH CARE COMPANIES' PRODUCTS, PRIMARILY SURGICAL PRE-PACKAGED PROCEDURE TRAYS. FOR THE FISCAL YEARS ENDED MARCH 31, 2001, 2000 AND 1999, OPERATING ROOM TOWELS ACCOUNTED FOR 29%, 29% AND 31%, RESPECTIVELY, OF THE COMPANY'S TOTAL SALES. GAUZE SPONGES - GAUZE SPONGES ARE USED IN THE OPERATING ROOM AS WELL AS THROUGHOUT THE HOSPITAL. THEY ARE ALSO USED EXTENSIVELY THROUGHOUT THE ALTERNATE CARE MARKET, INCLUDING PHYSICIANS' OFFICES, HEALTH CLINICS, DENTISTS' OFFICES AND IN VETERINARY PRACTICES. THE COMPANY ALSO INTRODUCED GAUZE FLUFFS, WHICH ARE PRE-FOLDED GAUZE SPONGES USED FOR COMPRESSION AND ABSORPTION OF BLOOD AND OTHER FLUIDS. BURN DRESSINGS - AS AN EXTENSION OF ITS PRODUCT LINE, THE COMPANY INTRODUCED DRY BURN AND NON-ADHERENT GAUZE DRESSINGS. THE DRY BURN DRESSING IS COMPOSED OF MULTIPLE LAYERS OF FOLDED GAUZE THAT ARE TYPICALLY CUSTOMIZED FOR INDIVIDUAL HOSPITALS AS TO SIZE, WEAVE, FOLDS, AND STITCHING. THE NON-ADHERENT DRESSINGS REDUCE STICKING AND SKIN REMOVAL DURING DRESSING CHANGES, THEREBY ALLEVIATING TRAUMA AND PAIN TO THE WOUND SITE. SPECIALTY SPONGES - THE COMPANY'S LINE OF SPECIALTY SPONGES IS AN EXTENSION TO ITS LAPAROTOMY SPONGES. THE COMPANY'S SPECIALTY SPONGES ARE USED INVASIVELY IN A VARIETY OF SURGICAL PROCEDURES AND ARE MANUFACTURED FOR A MULTITUDE OF PURPOSES AND CLASSIFIED AS FOLLOWS: (A) DISSECTING SPONGES - PRIMARILY UTILIZED IN SURGICAL PROCEDURES TO SEPARATE TISSUE AS OPPOSED TO CUTTING, THEREBY REDUCING BLEEDING AND TRAUMA TO THE ORGAN. THE COMPANY'S DISSECTING SPONGES ARE PRODUCED IN THREE SPECIFIC TYPES OF SPONGES. (I) PEANUT SPONGE - A SMALL, FIRM GAUZE SPONGE FOR DISSECTING AND DELICATE SPONGING. THE PEANUT SPONGE IS CAREFULLY FOLDED TO ENCOMPASS AN X-RAY ELEMENT AND IS MANUFACTURED TO ALLOW THE SURGEON TO ADJUST FIRMNESS FOR SPECIFIC APPLICATION. (II) KITTNER DISSECTOR - A VERY FIRM, BLUNT DISSECTOR MADE OF RAVEL FREE ABDOMINAL TAPE, WHICH IS HAND STITCHED TO FIRMLY LOCK IN AN X-RAY ELEMENT AND TO ENSURE THE SPONGE INTEGRITY. (III) CHERRY DISSECTOR - A ROUND, SOFT DISSECTOR SPONGE CONSTRUCTED FROM COTTON FOR BLUNT DISSECTION. A SMALL HOLE FACILITATES EASY GRASPING WITH HEMOSTATIC FORCEPS. 3 (B) TONSIL SPONGES - A ROUND, FIBER FILLED GAUZE CONSTRUCTED WITH A STRONG ABDOMINAL TAPE STRING SEWN INTO THE SPONGE TO ANCHOR THE SPONGE WHEN USED IN HARD TO RETRIEVE PLACES. (C) STICK SPONGES - A ROUND, FIBER FILLED GAUZE SPONGE USED FOR DEEP SPONGING OR PREPPING. (D) EYE SPEARS - A CELLULOSE FIBER TIP UTILIZED DURING EYE SURGERY, CONSTRUCTED WITH A MEMORY-FREE PLASTIC HANDLE IN ORDER TO BEND TO ANY ANGLE THE SURGEON DESIRES. THE EYE SPEAR ABSORBS 10 TIMES ITS WEIGHT IN FLUID. ENDOSCOPIC SPECIALTY SPONGES - AS AN EXTENSION OF ITS LINE OF SPECIALTY SPONGES, THE COMPANY INTRODUCED ENDOSCOPIC SPECIALTY SPONGES. ENDOSCOPIC SPECIALTY SPONGES ARE USED IN LESS INVASIVE SURGICAL PROCEDURES. THE COMPANY'S ENDOSCOPIC SPECIALTY SPONGES, ALL OF WHICH ARE DISSECTING SPONGES, ARE MADE OF 100% COTTON AFFIXED TO A FIBERGLASS STICK AND CLASSIFIED AS FOLLOWS: (A) ENDOSCOPIC KITTNER - A VERY FIRM, BLUNT DISSECTING SPONGE MADE OF A RAVEL-FREE ABDOMINAL TAPE, WHICH IS HAND STITCHED TO LOCK IN AN X-RAY ELEMENT AND SECURELY AFFIXED TO A FIBERGLASS STICK WITH ORTHOPEDIC GLUE TO ENSURE THE SPONGE INTEGRITY. (B) ENDOSCOPIC CHERRY/BULLET - THE NAMES REFER TO THE SHAPE OF THE SPONGES. BOTH ARE SOFT, BLUNT DISSECTING SPONGES MADE OF SPUN COTTON, SECURELY AFFIXED TO A FIBERGLASS STICK WITH ORTHOPEDIC GLUE TO ENSURE THE SPONGE INTEGRITY. DISPOSABLE SURGICAL LIGHT HANDLE COVERS - LIGHT SHIELDS(TM) - A PATENTED DESIGN ASSURES A SECURE FIT AND ACTS AS A STERILE BARRIER ON SURGICAL LIGHT HANDLES IN THE OPERATING ROOM. LIGHT SHIELDS(TM) ARE MANUFACTURED OF A HEAVY GAUGE FLEXIBLE PLASTIC FOR THE OPTIMUM ASSURANCE OF A STERILE BARRIER. NEEDLE COUNTERS - RED PLASTIC BOXES MANUFACTURED FROM MEDICAL GRADE MATERIALS DESIGNED TO RESIST BREAKAGE AND PUNCTURES. THEY ARE PRODUCED WITH A VARIETY OF DESIGNS, INCLUDING SURGICAL GRADE MAGNETS IN ORDER TO FACILITATE SHARPS DISPOSAL, FOAM BLOCKS AND FOAM STRIPS WITH VARYING COUNT CAPACITY AND DESIGNS. SURGICAL MARKING PENS - SPECIFICALLY DESIGNED SO THAT THE PEN BARREL FITS COMFORTABLY IN THE SURGEON'S HAND AND IS MADE WITH GENTIAN VIOLET COLOR INK. ALL PEN BARRELS ARE EMBOSSED WITH A 5 CM. RULER AND MAY ALSO INCLUDE A 15 CM. COATED RULER AND BLANK LABELS. CONVENIENCE KITS - THE COMPANY OFFERS ITS CUSTOMERS THE ABILITY TO PURCHASE MULTIPLE PRODUCTS PACKAGED WITH ITS NEEDLE COUNTERS. THE COMPANY HAS THE FLEXIBILITY TO PACKAGE MANY DIFFERENT KITS TO INDIVIDUALIZE A HOSPITAL'S REQUIREMENTS. MEDICAL POUCHES - USED TO HOUSE INSTRUMENTS DURING THE STERILIZATION PROCESS AND MAINTAIN STERILITY OF THE INSTRUMENT UNTIL IT IS NEEDED. THE POUCHES ARE PRIMARILY USED IN HOSPITAL CENTRAL SUPPLY, OPERATING ROOMS AND IN PHYSICIANS' AND DENTISTS' OFFICES AS WELL AS IN ANY ENVIRONMENT WHERE STERILE INSTRUMENTS ARE NEEDED. THERE ARE THREE DIFFERENT STYLES OF POUCHES AVAILABLE - SELF SEAL, HEAT SEAL AND ROLLS. THE SELF SEAL IS ALREADY SEALED ON THREE SIDES AND INCLUDES A PEEL BACK ADHESIVE STRIP ON THE BOTTOM OF THE PACKAGE, WHICH WHEN FOLDED OVER WILL SEAL THE PACKAGE. THE SECOND TYPE IS HEAT SEAL, WHICH IS ALSO SEALED ON THREE SIDES BUT NEEDS A HEAT SEALER TO SEAL THE FOURTH SIDE. THE COMPANY ALSO MARKETS A ROLL PRODUCT, WHERE THE USER COULD PULL AS LONG A POUCH AS NEEDED. THIS REQUIRES BOTH ENDS TO BE SEALED. INFECTIOUS WASTE BAGS - USED TO COLLECT, STORE AND TRANSPORT BIOHAZARDOUS AND INFECTIOUS WASTE. THE BAGS COME IN A VARIETY OF SIZES, AND ARE RED WITH THE INTERNATIONAL BIOHAZARD SYMBOL CLEARLY MARKED ON THE BAG. THE BAGS ARE MADE OF HIGH QUALITY RESINS WITH REINFORCED SEALS FOR PUNCTURE RESISTANCE AND TO REDUCE THE RISK OF LEAKAGE. 4 LABORATORY SPECIMEN TRANSPORT BAGS - USED TO COLLECT, TRANSPORT OR HOLD SAMPLES FROM PATIENTS FOR EXAMINATION OR ANALYTICAL PROCEDURES. THE BAGS FEATURE A SEPARATE POUCH WHICH CAN BE USED FOR ACCOMPANYING PAPERWORK. THE POUCH HAS A SPECIAL SEAL THAT WILL ENSURE THAT THE PAPERWORK DOES NOT GET CONTAMINATED OR CONTAMINATE THE LAB SPECIMEN. STERILITY MAINTENANCE COVERS - USED TO COVER STERILE PRODUCTS AND PROTECT AGAINST DUST, MOISTURE OR ANY OTHER CONTAMINANTS THAT MAY RENDER THE PRODUCT NON-STERILE. THEY ARE USED TO PACKAGE, STORE, AND TRANSPORT WHILE MAINTAINING A DUST-FREE ENVIRONMENT FOR STERILE PACKS. STERILITY MAINTENANCE COVERS COME IN A VARIETY OF SIZES AND ARE SELF SEAL LIKE THE STERILIZATION POUCHES. STERILITY MAINTENANCE COVERS ARE CLEAR SO THAT YOU CAN VIEW THE CONTENTS, ARE STRONG FOR PROTECTION, AND TEAR IN A LINEAR FASHION FOR EASY ACCESS TO THE PRODUCT. SPONGE COUNTER BAGS - A COUNTING SYSTEM, KNOWN AS POCKET COUNT(TM), USED IN THE OPERATING ROOM TO COUNT LAPAROTOMY SPONgEs AND GAUZE SPONGES AFTER USE. THEY ARE CLEAR FACED OPAQUE BACKED PLASTIC BAGS WITH FIVE LARGE POCKETS THAT EXTEND VERTICALLY DOWN. EACH POCKET IS TACKED IN THE CENTER CREATING TWO COMPARTMENTS. THE TACK CAN BE SEPARATED TO CREATE ONE LARGE POCKET. THE BAG CAN HOLD TEN GAUZE SPONGES. WHEN THE TACKS ARE SEPARATED, THE BAG WILL HOLD ONE LARGE LAPAROTOMY SPONGE IN EACH OF ITS FIVE POCKETS. THE BAG ACTS AS A FLUID RECEPTACLE AS WELL AS A VISUAL COUNT OF THE SPONGES. THE COMPANY ALSO PRODUCES A UNIQUELY DESIGNED AND PATENTED SPONGE COUNTING SYSTEM KNOWN AS SAFE-T-COUNT(TM). AUTOCLAVABLE BAGS - BAGS USED FOR AUTOCLAVING AND STERILIZING INFECTIOUS WASTE. STERILIZATION MONITORING PRODUCTS - THESE ARE PRINTED PAPER AND CHEMICAL DEVICES USED TO MEASURE CERTAIN NECESSARY PARAMETERS WITHIN A STERILIZATION CYCLE. INDICATORS: MEASURE PRESENCE OF ETO OR STEAM AND TEMPERATURE INTEGRATORS: A NEW TECHNOLOGY THAT GIVES A BETTER ASSURANCE THAN TRADITIONAL INDICATORS THAT THE PROPER PARAMETERS OF STERILIZATION WERE FULFILLED, INCLUDING TIME, TEMPERATURE AND MOISTURE. BOWIE DICK TEST PACK: TESTS FOR RESIDUAL AIR LEFT IN AN AUTOCLAVE FROM AIR LEAKS, INSUFFICIENT VACUUM OR POOR STEAM QUALITY. THESE PRODUCTS ARE USED INSIDE THE PACKAGED PRODUCTS AND POUCHES THROUGHOUT THE HOSPITAL, CLINIC AND DOCTOR'S OFFICE ENVIRONMENT WHENEVER STERILIZATION TAKES PLACE. KIT AND TRAY PRODUCTS - THE COMPANY OFFERS A PROPRIETARY ONE TIME (R) BRAND OF KIT AND TRAY PRODUCTS, WHICH ARE PACKAGeD FOR USE IN A WIDE VARIETY OF MINOR PROCEDURES. BOTH PROCEDURAL REQUIREMENTS AND HOSPITAL PREFERENCE DETERMINE TRAY COMPONENTS, AND MOST CONTAIN PROPRIETARY ITEMS SUCH AS: ACU-DYNE(R), AN ANTI-MICROBIAL SOLUTION OF POVIDONE IODINE WHICH COMES IN VARIOUS PACKAGES AND APPLICATORS; AND THE ONE TIME(R) BRAND OF DISPOSABLE INSTRUMENTS AND ANTISEPTICS. SEVERAL EXAMPLES OF KIT AND TRAY CONFIGURATIONS FOR VARIOUS PROCEDURES ARE AS FOLLOWS: (A) SUTURE REMOVAL TRAY - TYPICALLY INCLUDES LITTAUER SCISSORS, ALCOHOL PREP PADS, METAL OR PLASTIC FORCEPS, SPONGES AND ACU-DYNE(R) PREP SWABs. (B) I.V. START KIT - TYPICALLY INCLUDES A TOURNIQUET, ACU-DYNE(R) AMPULE AND OINTMENT, ALCOHOL PREP PADS, AND A DRESSINg. (C) CENTRAL LINE TRAY - TYPICALLY INCLUDES ALCOHOL SWABS AND PREP PADS, ACU-DYNE(R) SWABS AND OINTMENT, BENZOIN, A COTTON-TIPPED APPLICATOR, GAUZE TAPE AND A DRESSING. 5 NET, PADDING AND WOUND CARE - INCLUDES PROPRIETARY TUBEGAUZ(R) PREMIUM BRAND AND SEPRO(R) VALUE BRAND ELASTIC NETS, WHICH Are TUBULAR BANDAGES USED FOR DRESSING RETENTION. THIS CATEGORY ALSO INCLUDES TUBEGAUZ(R) BRAND TUBULAR GAUZE, WHICH IS USED TO BANDAGE FINGERS, TOES, HANDS, OR OTHER AREAS THAT REQUIRE WRAPPING TO BODILY CONTOURS. PADDING PRODUCTS ARE USED AS A PROTECTIVE CUSHIONING MATERIAL FOR SENSITIVE AREAS, AND ARE SOLD IN STYLES THAT OFFER UNIQUE CHARACTERISTICS SUCH AS BEING MOLD-RESISTANT, WATER-REPELLANT OR DESIGNS FOR IMPROVED AIR CIRCULATION. INSTRUMENT PACKS - INCLUDES A BROAD ARRAY OF NEEDLE HOLDERS, HEMOSTATS, VARIOUS PROCEDURAL SCISSORS, SCALPELS AND FORCEPS. PATENTS AND TRADEMARKS ---------------------- THE COMPANY ACTIVELY PURSUES A POLICY OF SEEKING PATENT PROTECTION, BOTH IN THE UNITED STATES AND ABROAD, FOR ITS PROPRIETARY TECHNOLOGY. THERE CAN BE NO ASSURANCE THAT THE COMPANY'S PATENTS WILL NOT BE VIOLATED OR THAT ANY ISSUED PATENTS WILL PROVIDE PROTECTION THAT HAS COMMERCIAL SIGNIFICANCE. LITIGATION MAY BE NECESSARY TO PROTECT THE COMPANY'S PATENT POSITION. SUCH LITIGATION MAY BE COSTLY AND TIME-CONSUMING, AND THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE SUCCESSFUL IN SUCH LITIGATION. SINCE NO SINGLE PATENT COVERS PRODUCT LINES THAT CONSTITUTE 5% OR MORE OF ANY SALES OF THE COMPANY FOR FISCAL 2001, THE COMPANY DOES NOT BELIEVE THAT ANY VIOLATION OF ANY PATENTS OWNED BY THE COMPANY WOULD HAVE A MATERIAL ADVERSE EFFECT ON IT OR ITS BUSINESS PROSPECTS. THE COMPANY OWNS SEVERAL PATENTS AND TRADEMARKS. WHILE IT CONSIDERS THAT IN THE AGGREGATE THE PATENTS AND TRADEMARKS ARE IMPORTANT IN THE OPERATION OF ITS BUSINESS, IT DOES NOT CONSIDER THAT ANY OF THEM, OR ANY GROUP OF THEM, ARE OF SUCH IMPORTANCE THAT TERMINATION WOULD MATERIALLY AFFECT ITS BUSINESS. ALTHOUGH THERE IS NO ASSURANCE THAT OTHER COMPANIES WILL NOT BE SUCCESSFUL IN DEVELOPING SIMILAR PRODUCTS WITHOUT VIOLATING THE RIGHTS OF THE COMPANY, MANAGEMENT DOES NOT BELIEVE THAT THE INVALIDATION OF ANY PATENTS OWNED BY THE COMPANY WOULD HAVE A MATERIAL ADVERSE EFFECT ON IT OR ITS BUSINESS PROSPECTS. WHILE THE PROTECTION OF PATENTS IS IMPORTANT TO THE COMPANY'S BUSINESS, MANAGEMENT DOES NOT BELIEVE ANY ONE PATENT IS ESSENTIAL TO THE SUCCESS OF THE COMPANY. COMPETITION ----------- THERE ARE MANY COMPANIES, BOTH PUBLIC AND PRIVATE, ENGAGED IN THE DEVELOPMENT AND MARKETING OF DISPOSABLE STERILE AND NON-STERILE SURGICAL SUPPLIES, INCLUDING LAPAROTOMY SPONGES. THE COMPANY IS SUBJECT TO VARIOUS LEVELS OF COMPETITION BASED UPON PERFORMANCE, QUALITY AND PRICING. THE COMPANY'S MAJOR COMPETITORS INCLUDE LARGE MANUFACTURERS, WHICH HAVE GREATER FINANCIAL RESOURCES THAN THE COMPANY. THE COMPETITORS DIFFER BASED UPON THE PRODUCTS BEING SOLD. IN THE SALE OF STERILE LAPAROTOMY SPONGES, WHERE THE KENDALL COMPANY, A SUBSIDIARY OF TYCO INDUSTRIES, INC. AND MEDLINE INDUSTRIES, INC. ARE COMPETITORS, MEDICAL ACTION'S SALES REPRESENT A SIGNIFICANT SHARE OF THE DOMESTIC MARKET. THE COMPANY HAS A SUPPLY AGREEMENT WITH ALLEGIANCE HEALTHCARE CORPORATION, A SUBSIDIARY OF CARDINAL HEALTH, INC., IN WHICH THE COMPANY'S DISPOSABLE STERILE LAPAROTOMY SPONGES AND DISPOSABLE STERILE OPERATING ROOM TOWELS WERE DESIGNATED AS THEIR "BEST VALUE". THE COMPANY'S PRIMARY COMPETITORS IN THE SALE OF STERILE OPERATING ROOM TOWELS, IN WHICH THE COMPANY IS ALSO THE LEADING SUPPLIER IN THE DOMESTIC MARKET, ARE MEDLINE INDUSTRIES, INC. AND DEROYAL, INC. IN THE SALE OF MEDICAL POUCHES TO THE HOSPITAL MARKET, WHERE THE COMPANY IS ONE OF THE LEADING SUPPLIERS, THE COMPANY'S PRIMARY COMPETITORS INCLUDE TOWER MEDICAL, A SUBSIDIARY OF REXAM, PLC. IN THE SALE OF QUANTECH PRODUCTS, WHERE THE COMPANY'S PORTION OF THE MARKET IS RELATIVELY INSIGNIFICANT, THE COMPANY'S PRIMARY COMPETITOR IS DEVON INDUSTRIES, INC., A SUBSIDIARY OF TYCO INDUSTRIES, INC. 6 HEALTHCARE REFORM ----------------- IN RECENT YEARS, SEVERAL COMPREHENSIVE HEALTHCARE REFORM PROPOSALS WERE INTRODUCED IN THE U.S. CONGRESS. THE INTENT OF THE PROPOSALS WAS, GENERALLY, TO EXPAND HEALTHCARE COVERAGE FOR THE UNINSURED AND REDUCE THE GROWTH OF TOTAL HEALTHCARE EXPENDITURES. WHILE NONE OF THE PROPOSALS WERE ADOPTED, HEALTHCARE REFORM MAY AGAIN, BE ADDRESSED BY THE CURRENT U.S. CONGRESS. WHILE THE COMPANY CANNOT PREDICT WHETHER ANY HEALTHCARE REFORM LEGISLATION WILL BE APPROVED OR WHAT EFFECT, IF ANY, THAT SUCH HEALTHCARE REFORM LEGISLATION WILL HAVE ON THE COMPANY OR ITS OPERATIONS, THE COMPANY BELIEVES THAT BASED ON THE INTENT OF SUCH PROPOSALS, HEALTHCARE LEGISLATION MAY HAVE SOME BENEFICIAL EFFECTS ON ITS BUSINESS BY INCREASING THE AVAILABILITY OF HEALTHCARE. REGULATION ---------- AS A MANUFACTURER OF MEDICAL DEVICES, THE COMPANY IS SUBJECT TO REGULATION BY, AMONG OTHER GOVERNMENTAL ENTITIES, THE U.S. FOOD AND DRUG ADMINISTRATION ("FDA") AND THE CORRESPONDING AGENCIES OF THE STATES AND FOREIGN COUNTRIES IN WHICH THE COMPANY SELLS ITS PRODUCTS. THESE REGULATIONS GOVERN THE INTRODUCTION OF NEW MEDICAL DEVICES, THE OBSERVANCE OF CERTAIN STANDARDS WITH RESPECT TO THE MANUFACTURE, TESTING AND LABELING OF SUCH DEVICES, THE MAINTENANCE OF CERTAIN RECORDS, THE TRACKING OF DEVICES AND OTHER MATTERS. ALL MEDICAL DEVICES ARE REQUIRED TO BE REGISTERED WITH THE FDA. THE COMPANY MUST UPDATE ITS ESTABLISHMENT AND LISTING INFORMATION ON AN ANNUAL BASIS. PURSUANT TO THE FOOD, DRUG AND COSMETIC ACT ("FDC ACT"), MEDICAL DEVICES INTENDED FOR HUMAN USE ARE CLASSIFIED INTO THREE CATEGORIES, CLASSES I, II AND III, ON THE BASIS OF THE CONTROLS DEEMED NECESSARY BY THE FDA TO REASONABLY ASSURE THEIR SAFETY AND EFFECTIVENESS. CLASS I DEVICES ARE SUBJECT TO GENERAL CONTROLS (FOR EXAMPLE, LABELING, PREMARKET NOTIFICATION AND ADHERENCE TO GOOD MANUFACTURING PRACTICE REGULATIONS) AND CLASS II DEVICES ARE SUBJECT TO GENERAL AND SPECIAL CONTROLS (FOR EXAMPLE, PERFORMANCE STANDARDS, POST-MARKET SURVEILLANCE, PATIENT REGISTRIES AND FDA GUIDELINES). GENERALLY, CLASS III DEVICES ARE THOSE WHICH MUST RECEIVE PREMARKET APPROVAL ("PMA") FROM THE FDA TO ENSURE THEIR SAFETY AND EFFECTIVENESS (FOR EXAMPLE, LIFE-SUSTAINING, LIFE-SUPPORTING AND IMPLANTABLE DEVICES, OR NEW DEVICES WHICH HAVE NOT BEEN FOUND SUBSTANTIALLY EQUIVALENT TO LEGALLY MARKETED DEVICES. CLASS I DEVICES, UNLESS EXEMPT, AND CLASS II DEVICES REQUIRE PREMARKET NOTIFICATION CLEARANCE PURSUANT TO SECTION 510(K) OF THE FDC ACT. CLASS III DEVICES ARE REQUIRED TO HAVE A PMA. A 510(K) PREMARKET NOTIFICATION CLEARANCE INDICATES THAT THE FDA AGREES WITH AN APPLICANT'S DETERMINATION THAT THE PRODUCT FOR WHICH CLEARANCE HAS BEEN SOUGHT IS SUBSTANTIALLY EQUIVALENT TO ANOTHER MEDICAL DEVICE THAT HAS BEEN PREVIOUSLY MARKETED. TO DATE, ALL OF THE COMPANY'S PRODUCTS HAVE RECEIVED 510(K) CLEARANCES OR ARE EXEMPT FROM THE 510(K) CLEARANCE PROCESS. IN ADDITION TO REQUIRING CLEARANCE OR APPROVAL FOR NEW PRODUCTS, THE FDA MAY REQUIRE CLEARANCE OR APPROVAL PRIOR TO MARKETING PRODUCTS THAT ARE MODIFICATIONS OF EXISTING PRODUCTS. THE FDC ACT PROVIDES THAT NEW 510(K) CLEARANCES ARE REQUIRED WHEN, AMONG OTHER THINGS, THERE IS A MAJOR CHANGE OR MODIFICATION IN THE INTENDED USE OF THE DEVICE OR A CHANGE OR MODIFICATION TO A LEGALLY MARKETED DEVICE THAT COULD SIGNIFICANTLY AFFECT ITS SAFETY OR EFFECTIVENESS. A MANUFACTURER IS EXPECTED TO MAKE THE INITIAL DETERMINATION AS TO WHETHER A PROPOSED CHANGE TO A CLEARED DEVICE OR TO ITS INTENDED USE IS OF A KIND THAT WOULD NECESSITATE THE FILING OF A NEW 510(K) NOTIFICATION. THE COMPANY IS ALSO REQUIRED TO REGISTER WITH THE FDA AS A DEVICE MANUFACTURER AND TO COMPLY WITH THE FDA'S GOOD MANUFACTURING PRACTICES UNDER THE QUALITY SYSTEM REGULATIONS ("GMP/QSR"). THESE REGULATIONS REQUIRE THAT THE COMPANY MANUFACTURE ITS PRODUCTS AND MAINTAIN ITS RECORDS IN A PRESCRIBED MANNER WITH RESPECT TO MANUFACTURING, TESTING AND CONTROL ACTIVITIES. THE COMPANY'S MANUFACTURING, QUALITY CONTROL AND QUALITY ASSURANCE PROCEDURES AND DOCUMENTS ARE INSPECTED AND EVALUATED PERIODICALLY BY THE FDA. 7 THE EUROPEAN UNION HAS PROMULGATED RULES, UNDER THE MEDICAL DEVICES DIRECTIVE, OR MDD, WHICH REQUIRE MEDICAL DEVICES TO BEAR THE "CE MARK". THE CE MARK IS AN INTERNATIONAL SYMBOL OF ADHERENCE TO QUALITY ASSURANCE STANDARDS. THE COMPANY RECEIVED ISO9001/EN46001 CERTIFICATION FOR ITS ARDEN, NORTH CAROLINA MANUFACTURING FACILITY AND HAS INSTITUTED ALL THE SYSTEMS NECESSARY TO MEET THE MEDICAL DEVICE DIRECTIVE, THUS ACQUIRING THE ABILITY TO AFFIX THE CE MARK TO CERTAIN PRODUCTS. SALES, MARKETING AND CUSTOMERS ------------------------------ THE COMPANY'S PRODUCTS ARE PRESENTLY MARKETED AND SOLD PRIMARILY TO ACUTE CARE FACILITIES THROUGHOUT THE UNITED STATES THROUGH A NETWORK OF DIRECT SALES PERSONNEL AND MANUFACTURERS' REPRESENTATIVES. IN ADDITION, THE COMPANY IS EXPANDING ITS TARGET MARKETS TO INCLUDE PHYSICIAN, DENTAL AND VETERINARY OFFICES. THERE ARE APPROXIMATELY 32 DIRECT SALES PERSONNEL AND 3 MANUFACTURERS' REPRESENTATIVES THROUGHOUT THE UNITED STATES ENGAGED IN THE SALES AND MARKETING OF THE COMPANY'S PRODUCTS. SALES ARE PRIMARILY MADE TO INDEPENDENT DISTRIBUTORS, WHO MAINTAIN SUFFICIENT INVENTORY TO SERVICE CUSTOMER REQUIREMENTS. THE COMPANY'S DISTRIBUTION NETWORK IS COMPRISED OF HOSPITAL DISTRIBUTORS, ALTERNATE CARE DISTRIBUTORS, PHYSICIAN DISTRIBUTORS, VETERINARY DISTRIBUTORS, DENTAL DISTRIBUTORS AND INDUSTRIAL SAFETY DISTRIBUTORS COVERING THE ENTIRE UNITED STATES AND CERTAIN INTERNATIONAL MARKETPLACES. THE COMPANY'S PRODUCTS ARE TYPICALLY PURCHASED PURSUANT TO PURCHASE ORDERS OR SUPPLY AGREEMENTS IN WHICH THE PURCHASER SPECIFIES WHETHER SUCH PRODUCTS ARE TO BE SUPPLIED THROUGH A DISTRIBUTOR OR DIRECTLY BY THE COMPANY. MANAGEMENT BELIEVES THAT THE CONTINUING PRESSURE TO UTILIZE LOW-COST, DISPOSABLE MEDICAL PRODUCTS HAS SIGNIFICANTLY EXPANDED THE USE OF CUSTOM PROCEDURE TRAYS, WHICH CONTAIN THE NECESSARY ITEMS DESIGNED FOR USE IN SPECIFIC PROCEDURES BY SURGICAL TEAMS. MANY OF THE CUSTOM TRAY SUPPLIERS ARE VERTICALLY INTEGRATING THE PACKAGING PROCESS BY BUYING BULK, NON-STERILE OPERATING ROOM TOWELS, LAPAROTOMY SPONGES AND OTHER PRODUCTS MANUFACTURED BY THE COMPANY TO PLACE IN THESE CUSTOM TRAYS. THE TRAYS ARE THEN STERILIZED, SAVING VALUABLE NURSING TIME AND THE COSTS ASSOCIATED WITH INDIVIDUAL PRODUCT PACKAGING. IN ADDITION TO PRIVATE AND PUBLIC HOSPITALS AND HEALTH FACILITIES, CUSTOMERS FOR THE COMPANY'S PRODUCTS INCLUDE GROUP PURCHASING ORGANIZATIONS AND INVESTOR-OWNED HOSPITAL CHAINS. WITH THE EMERGENCE OF THESE COOPERATIVE BUYING GROUPS AND CHAINS AS MAJOR PURCHASERS OF MEDICAL/SURGICAL PRODUCTS, A SIGNIFICANT PORTION OF THE COMPANY'S SALES ARE DEPENDENT UPON ITS ABILITY TO PROVIDE ITS PRODUCTS THROUGHOUT A WIDE GEOGRAPHICAL AREA AND TO SERVICE SUBSTANTIALLY ALL MEMBERS OF THE GROUP OR CHAIN. THE COMPANY'S PRESENT DISTRIBUTOR-ORIENTED MARKETING NETWORK HAS ENABLED IT TO BECOME A SELECTED SOURCE FOR MANY OF THE COOPERATIVE BUYING GROUPS AND CHAINS. THE COMPANY RECORDS SALES UPON THE SHIPMENT OF INVENTORY TO THE DISTRIBUTOR, AT WHICH TIME TITLE PASSES TO THE DISTRIBUTOR. PRICING TO ITS ULTIMATE CUSTOMER UNDER THESE SUPPLY AGREEMENTS IS USUALLY ESTABLISHED FOR THE CONTRACT PERIOD, WHICH WILL TYPICALLY BE FROM ONE TO THREE YEARS. THE COMPANY VIEWS ITS ULTIMATE CUSTOMERS AS THE MEDICAL PROFESSIONALS WHO USE ITS PRODUCTS, RATHER THAN THE DISTRIBUTORS. NO INDIVIDUAL CUSTOMER OR AFFILIATED GROUP OF CUSTOMER ACCOUNTS ACCOUNTED FOR MORE THAN 10% OF THE COMPANY'S NET SALES IN ANY OF THE PAST THREE FISCAL YEARS. NEVERTHELESS, SALES TO OWENS & MINOR, INC., ALLEGIANCE HEALTHCARE CORPORATION AND MCKESSON GENERAL MEDICAL, DIVERSIFIED DISTRIBUTION COMPANIES (THE "DISTRIBUTORS") ACCOUNTED FOR APPROXIMATELY 31%, 23% AND 12%, RESPECTIVELY, FOR THE FISCAL YEAR ENDED MARCH 31, 2001, 27%, 24% AND 11% OF NET SALES, RESPECTIVELY, FOR THE FISCAL YEAR ENDED MARCH 31, 2000 AND 25%, 25% AND 11%, RESPECTIVELY FOR THE FISCAL YEAR ENDED MARCH 31, 1999. ALTHOUGH THE DISTRIBUTORS MAY BE DEEMED IN A TECHNICAL SENSE TO BE MAJOR PURCHASERS OF THE COMPANY'S PRODUCTS, THE DISTRIBUTORS TYPICALLY SERVE AS A DISTRIBUTOR UNDER A PURCHASE ORDER OR SUPPLY AGREEMENT BETWEEN THE CUSTOMER AND THE COMPANY AND DOES NOT PURCHASE FOR ITS OWN ACCOUNT. THE COMPANY, THEREFORE, DOES NOT BELIEVE IT IS APPROPRIATE TO CATEGORIZE THE DISTRIBUTORS AS ACTUAL CUSTOMERS. 8 THE COMPANY BELIEVES IT HAS ESTABLISHED AN EFFICIENT SYSTEM FOR MARKETING ITS PRODUCTS THROUGHOUT THE UNITED STATES, AND INTENDS TO UTILIZE THESE EXISTING SALES METHODS AND CHANNELS TO MARKET NEW PRODUCTS AS THEY ARE DEVELOPED OR ACQUIRED. RESEARCH AND DEVELOPMENT ------------------------ PRODUCT DEVELOPMENT COSTS CHARGED TO INCOME WERE $457,000, $519,000 AND $446,000 FOR THE FISCAL YEARS ENDED MARCH 31, 2001, 2000 AND 1999, RESPECTIVELY. EMPLOYEES --------- AS OF JUNE 1, 2001, THE COMPANY HAD 230 FULL-TIME EMPLOYEES WITH 168 IN MANUFACTURING AND DISTRIBUTION, 43 IN MARKETING AND SALES, AND 19 IN ADMINISTRATION. NONE OF THE COMPANY'S EMPLOYEES ARE REPRESENTED BY A LABOR UNION. THE COMPANY BELIEVES THAT ITS EMPLOYEE RELATIONS ARE SATISFACTORY. RAW MATERIALS ------------- THE PRINCIPAL RAW MATERIALS USED BY THE COMPANY ARE A FOUR-PLY MESH GAUZE LAPAROTOMY SPONGE AND COTTON HUCK TOWEL. OTHER MATERIALS AND SUPPLIES USED BY THE COMPANY INCLUDE GAUZE, GAUZE SPONGES, INJECTION MOLDED AND THERMOFORMED PLASTICS, MEDICAL INSTRUMENTS, FOAM, MEDICAL GRADE MAGNETS AND A VARIETY OF PACKAGING MATERIAL. SEVERAL OF THESE RAW MATERIALS ARE SUPPLIED FROM VENDORS OUTSIDE THE UNITED STATES. THE COMPANY PRESENTLY PURCHASES ITS PRINCIPAL COTTON RAW MATERIALS PRIMARILY FROM THE PEOPLES REPUBLIC OF CHINA AND TO A LESSER EXTENT, INDIA AND IS CURRENTLY SOURCING INSTRUMENTS FROM PAKISTAN, A PORTION OF ITS THERMOFORM PLASTICS FROM TAIWAN, PACKAGING MATERIAL FROM THE UNITED KINGDOM AND NEEDLE COUNTERS FROM THE PEOPLE'S REPUBLIC OF CHINA. THE COMPANY'S OPERATING ROOM TOWELS WHICH ARE IMPORTED FROM THE PEOPLES REPUBLIC OF CHINA HAVE BEEN CLASSIFIED AS A NON-MEDICAL DEVICE BY THE U.S. DEPARTMENT OF CUSTOMS, AND THEREFORE, ARE SUBJECT TO IMPORT QUOTA RESTRICTIONS WHICH COULD LIMIT THE COMPANY'S FUTURE ABILITY TO BRING THEM INTO THE COUNTRY. THE COMPANY CONTINUALLY EXPLORES ALTERNATE SOURCES OF SUPPLY FOR ALL OF ITS RAW MATERIALS. BACKLOG ------- THE COMPANY DOES NOT BELIEVE THAT ITS BACKLOG FIGURES ARE NECESSARILY INDICATIVE OF ITS BUSINESS SINCE MOST HOSPITALS AND HEALTH RELATED FACILITIES ORDER THEIR PRODUCTS ON A CONTINUOUS BASIS AND NOT PURSUANT TO ANY CONTRACTUAL ARRANGEMENTS. SINCE TYPICAL SHIPMENT TIMES RANGE FROM TWO TO FIVE DAYS, THE COMPANY MUST MAINTAIN SUFFICIENT INVENTORIES OF ALL PRODUCTS AT ALL TIMES. MANUFACTURING ------------- THE COMPANY CURRENTLY PURCHASES ITS LAPAROTOMY SPONGES, BURN DRESSINGS, OPERATING ROOM TOWELS AND NEEDLE COUNTERS FROM THE PEOPLES REPUBLIC OF CHINA. DURING THE PAST FEW YEARS, THE COMPANY ALSO PURCHASED CERTAIN OF THESE PRODUCTS, TO A LESSER EXTENT, FROM A NUMBER OF DIFFERENT COUNTRIES, INCLUDING MEXICO AND THE DOMINICAN REPUBLIC. AFTER THESE PRODUCTS ARE MANUFACTURED, THEY ARE SHIPPED TO THE COMPANY'S MANUFACTURING FACILITY IN ARDEN, NORTH CAROLINA, WHERE THEY ARE PACKAGED. THE COMPANY'S QUANTECH PRODUCTS, MEDICAL POUCHES AND ACME HEALTHCARE PRODUCTS ARE PREDOMINANTLY MANUFACTURED AND/OR ASSEMBLED IN THE COMPANY'S ARDEN, NORTH CAROLINA MANUFACTURING FACILITY. SOME OF THE MEDICAL AND SURGICAL SPECIALTY PRODUCTS SOLD BY THE COMPANY ARE PURCHASED FROM OTHER MANUFACTURERS, WHICH THE COMPANY BELIEVES ARE READILY AVAILABLE FROM A VARIETY OF MANUFACTURERS AND SUPPLIERS. 9 ITEM TWO - PROPERTIES --------------------- THE COMPANY OCCUPIES APPROXIMATELY 545 SQUARE FEET OF GENERAL OFFICE SPACE AT ITS FACILITY IN CALIFORNIA UNDER A REAL ESTATE LEASE EXPIRING ON JANUARY 13, 2002. THE COMPANY ALSO OWNS A 205,000 SQUARE FOOT MANUFACTURING, WAREHOUSE AND DISTRIBUTION FACILITY LOCATED ON APPROXIMATELY 32 ACRES IN ARDEN, NORTH CAROLINA AND A 12,000 SQUARE FOOT GENERAL OFFICE BUILDING ON APPROXIMATELY 1.4 ACRES IN HAUPPAUGE, NEW YORK. MANAGEMENT BELIEVES THAT THE COMPANY'S FACILITIES ARE ADEQUATE TO MEET ITS CURRENT NEEDS AND SHOULD CONTINUE TO BE ADEQUATE FOR THE FORESEEABLE FUTURE. SET FORTH BELOW IS A SUMMARY OF THE FACILITIES OWNED OR LEASED BY THE COMPANY.

LOCATION PRIMARY USE SQUARE FEET -------- ----------- ----------- ARDEN, NORTH CAROLINA MANUFACTURING/WAREHOUSE/DISTRIBUTION 205,000 (A) HAUPPAUGE, NEW YORK EXECUTIVE OFFICES 12,000 (B) SANTA ANA, CALIFORNIA GENERAL OFFICE 545 (C)

------------------------- (A) THE PRINCIPAL MANUFACTURING, DISTRIBUTION AND WAREHOUSE FACILITY OF THE COMPANY IS LOCATED ON PREMISES, WHICH THE COMPANY OWNS IN ARDEN, NORTH CAROLINA. AN INDUSTRIAL REVENUE BOND IN THE AMOUNT OF $4,600,000 WAS OUTSTANDING AS OF MARCH 31, 2001, WHICH WAS USED TO ACQUIRE AND RENOVATE THE FACILITY AND ACQUIRED CERTAIN MANUFACTURING EQUIPMENT. (B) THE HAUPPAUGE, NEW YORK CORPORATE OFFICES WERE ACQUIRED BY THE COMPANY IN JULY 2000, NO MORTGAGE INDEBTEDNESS WAS INCURRED WITH RESPECT TO THE PREMISES. (C) PREMISES ARE LEASED THROUGH JANUARY 13, 2002 AT AN ANNUAL RENTAL OF $12,0000. ITEM THREE - LEGAL PROCEEDINGS ------------------------------ THE COMPANY IS A PARTY TO SEVERAL LAWSUITS ARISING OUT OF THE CONDUCT OF ITS BUSINESS IN THE ORDINARY COURSE. WHILE THE RESULTS OF SUCH LAWSUITS CANNOT BE PREDICTED WITH CERTAINTY, MANAGEMENT DOES NOT EXPECT THAT THE ULTIMATE LIABILITIES, IF ANY, WILL HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL POSITION OR RESULTS OF OPERATIONS OF THE COMPANY. ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------------------- NO MATTERS WERE SUBMITTED TO A VOTE OF SECURITY HOLDERS DURING THE FOURTH QUARTER OF THE FISCAL YEAR. PART II ITEM FIVE - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ----------------------------------------------------------------------------- MATTERS ------- THE INFORMATION REQUIRED BY THIS ITEM IS SET FORTH IN REGISTRANT'S 2001 ANNUAL REPORT TO STOCKHOLDERS UNDER THE CAPTIONS "SELECTED FINANCIAL DATA" AND "STOCK TRADING", WHICH INFORMATION IS HEREBY INCORPORATED HEREIN BY REFERENCE. ITEM SIX - SELECTED FINANCIAL DATA ---------------------------------- THE INFORMATION REQUIRED BY THIS ITEM IS SET FORTH IN REGISTRANT'S 2001 ANNUAL REPORT TO STOCKHOLDERS CONTAINED UNDER THE CAPTION "SELECTED FINANCIAL DATA", WHICH INFORMATION IS HEREBY INCORPORATED HEREIN BY REFERENCE. 10 ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ---------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- THE INFORMATION REQUIRED BY THIS ITEM IS SET FORTH IN REGISTRANT'S 2001 ANNUAL REPORT TO STOCKHOLDERS CONTAINED UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", WHICH INFORMATION IS HEREBY INCORPORATED HEREIN BY REFERENCE. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS ------------------------------------------------ CERTAIN STATEMENTS IN THE COMPANY'S "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT CONSTITUTE FORWARD-LOOKING STATEMENTS AS DEFINED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. STATEMENTS INDICATING THE COMPANY "PLANS", "EXPECTS", "ESTIMATES" OR "BELIEVES" ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS, INCLUDING THE COMPANY'S FUTURE ECONOMIC PERFORMANCE AND FINANCIAL RESULTS. THE FORWARD-LOOKING STATEMENTS RELATE TO (I) EXPANSION OF THE COMPANY'S MARKET SHARE, (II) THE COMPANY'S GROWTH INTO NEW MARKETS, (III) INTERNAL DEVELOPMENT OF NEW PRODUCTS AND PRODUCT LINES, (IV) PROCUREMENT OF EXPORT VISAS FOR OPERATING ROOM TOWELS FROM CHINA, WHICH MAY IMPACT THEIR AVAILABILITY AND PRICING, AND (V) RETENTION OF THE COMPANY'S EARNINGS FOR USE IN THE OPERATION AND EXPANSION OF ITS BUSINESS. IMPORTANT FACTORS AND RISKS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFERRED TO IN THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE EFFECT OF ECONOMIC AND BUSINESS CONDITIONS, THE IMPACT OF CONSOLIDATION THROUGHOUT THE HEALTHCARE SUPPLY CHAIN, THE IMPACT OF HEALTHCARE REFORM, OPPORTUNITIES FOR ACQUISITIONS, THE COMPANY'S ABILITY TO EFFECTIVELY INTEGRATE ACQUIRED COMPANIES, THE ABILITY OF THE COMPANY TO MAINTAIN ITS GROSS PROFIT MARGINS, THE ABILITY TO OBTAIN ADDITIONAL FINANCING TO EXPAND THE COMPANY'S BUSINESS, THE ABILITY TO SUCCESSFULLY COMPETE WITH THE COMPANY'S COMPETITORS THAT HAVE GREATER FINANCIAL RESOURCES, THE AVAILABILITY AND POSSIBLE INCREASES IN RAW MATERIAL PRICES FOR OPERATING ROOM TOWELS, THE IMPACT OF CURRENT OR PENDING LEGISLATION AND REGULATION, AS WELL AS THE RISKS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, WHICH INCLUDE ITS ANNUAL REPORT ON FORM 10-K AND QUARTERLY REPORTS ON FROM 10-Q. THE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND INVOLVE A NUMBER OF KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE AND/OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS, EXPRESS OR IMPLIED, BY THE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, AND THAT IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN FORWARD-LOOKING STATEMENTS, THE INCLUSION OF SUCH STATEMENTS SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. ITEM SEVEN (A) - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK --------------------------------------------------------------------------- THE INFORMATION REQUIRED BY THIS ITEM IS SET FORTH IN REGISTRANT'S 2001 ANNUAL REPORT TO STOCKHOLDERS CONTAINED UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", WHICH INFORMATION IS HEREBY INCORPORATED HEREIN BY REFERENCE. ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------------------- THE INFORMATION REQUIRED BY THIS ITEM IS SET FORTH IN REGISTRANT'S 2001 ANNUAL REPORT TO STOCKHOLDERS UNDER THE CAPTIONS "REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS", "BALANCE SHEETS", "STATEMENTS OF EARNINGS", "STATEMENT OF SHAREHOLDERS' EQUITY", "STATEMENTS OF CASH FLOWS" AND "NOTES TO FINANCIAL STATEMENTS", WHICH INFORMATION IS HEREBY INCORPORATED HEREIN 11 BY REFERENCE. ITEM NINE - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- NONE. PART III THE INFORMATION REQUIRED BY PART III IS INCORPORATED BY REFERENCE TO THE COMPANY'S DEFINITIVE PROXY STATEMENT IN CONNECTION WITH ITS ANNUAL MEETING OF STOCKHOLDERS SCHEDULED TO BE HELD IN AUGUST 2001, TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS FOLLOWING THE END OF THE COMPANY'S FISCAL YEAR ENDED MARCH 31, 2001. PART IV ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K ------------------------------------------------------------------------------- (A) (1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES -------------------------------------------------------------- THE FOLLOWING FINANCIAL STATEMENTS OF MEDICAL ACTION INDUSTRIES INC., INCLUDED IN ITS ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED MARCH 31, 2001, ARE INCORPORATED BY REFERENCE IN ITEM 8: BALANCE SHEETS AT MARCH 31, 2001 AND 2000 STATEMENTS OF EARNINGS FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999 STATEMENT OF SHAREHOLDERS EQUITY FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999 NOTES TO FINANCIAL STATEMENTS THE FOLLOWING FINANCIAL STATEMENT SCHEDULE AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS OF MEDICAL ACTION INDUSTRIES INC. AND SUBSIDIARY IS INCLUDED IN ITEM 14(D): REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE ACCOUNTING REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION ARE NOT REQUIRED UNDER THE RELATED INSTRUCTIONS OR ARE INAPPLICABLE AND THEREFORE HAVE BEEN OMITTED. (3) EXHIBITS: EXHIBIT NO. 2.1 AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF AUGUST 12, 1994 AMONG REGISTRANT, QUANTECH ACQUISITION CORP. AND QUANTECH, INC. (EXHIBIT 2.1 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1995). 12 2.2 PURCHASE AGREEMENT DATED AS OF JANUARY 30, 1996 AMONG REGISTRANT, SBW ACQUISITION CORP., LAWSON MARDON MEDICAL PRODUCTS, INC. AND LAWSON MARDON MEDICAL PRODUCTS, A TRADING DIVISION OF LAWSON MARDON PACKAGING UK LTD. (EXHIBIT 2 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 6, 1996). 2.3 ASSET PURCHASE AGREEMENT DATED AS OF MARCH 9, 1999 BETWEEN ACME UNITED CORPORATION AND REGISTRANT (EXHIBIT 2 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED APRIL 1, 1999). 3.1 CERTIFICATE OF INCORPORATION, AS AMENDED (EXHIBIT 3.2 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1994). 3.2 BY-LAWS, AS AMENDED (EXHIBIT 3(B) TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1988). 10.1 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (EXHIBIT 10.1 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1997). 10.2 RESTRICTED MANAGEMENT STOCK BONUS PLAN, AS AMENDED (EXHIBIT 10(B) TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1988). 10.3 1989 NON-QUALIFIED STOCK OPTION PLAN, AS AMENDED (EXHIBIT 10.4 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1990). 10.4 1994 STOCK INCENTIVE PLAN (EXHIBIT 10.4 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1996). 10.5 EMPLOYMENT AGREEMENT DATED AS OF FEBRUARY 1, 1993 BETWEEN THE REGISTRANT AND PAUL D. MERINGOLO (EXHIBIT 10.4 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1993). 10.6 MODIFICATION AGREEMENT DATED AS OF FEBRUARY 5, 1996 BETWEEN THE REGISTRANT AND PAUL D. MERINGOLO (EXHIBIT 10 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 7, 1996). 10.7 MODIFICATION AGREEMENT DATED AS OF MAY 28, 1997 BETWEEN THE REGISTRANT AND PAUL D. MERINGOLO (EXHIBIT 10.7 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1997). 10.8 MODIFICATION AGREEMENT DATED AS OF JULY 21, 1999 BETWEEN THE REGISTRANT AND PAUL D. MERINGOLO (EXHIBIT 10 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JULY 30, 1999). 10.9 MODIFICATION AGREEMENT DATED AS OF MAY 31, 2000 BETWEEN THE REGISTRANT AND PAUL D. MERINGOLO (EXHIBIT 10 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JUNE 5, 2000). 10.10 JOINT VENTURE AGREEMENT BETWEEN THE REGISTRANT AND WUJIANG MEDICAL & HEALTH ARTICLES FACTORY DATED MARCH 29, 1989 (EXHIBIT 10(B) TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1989). 10.11 REVOLVING CREDIT NOTE AND AGREEMENT BETWEEN THE REGISTRANT AND A LENDING INSTITUTION DATED AS OF MARCH 18, 1999 (EXHIBIT 10 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED APRIL 1, 1999). 13 10.12 CHANGE IN CONTROL AGREEMENT DATED AS OF JUNE 1, 1995 BETWEEN THE REGISTRANT AND CERTAIN EXECUTIVE OFFICERS (EXHIBIT 10.8 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1995). 23.1* CONSENT OF GRANT THORNTON LLP. 99* ADDITIONAL EXHIBIT - UNDERTAKINGS (B) REPORTS ON FORM 8-K: -------------------- (I) NONE (C) EXHIBITS -------- THE RESPONSE TO THIS PORTION OF ITEM 14 IS SUBMITTED AS A SEPARATE SECTION OF THIS REPORT. (D) FINANCIAL STATEMENT SCHEDULES ----------------------------- THE RESPONSE TO THIS PORTION OF ITEM 14 IS SUBMITTED AS A SEPARATE SECTION OF THIS REPORT. ---------------------- WITH THE EXCEPTION OF THE AFOREMENTIONED INFORMATION INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-K, THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED MARCH 31, 2001 IS NOT TO BE DEEMED "FILED" AS PART OF THIS REPORT. *FILED HEREWITH 14 PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THIS 22ND DAY OF JUNE, 2001. MEDICAL ACTION INDUSTRIES INC. BY: /S/ PAUL D. MERINGOLO ------------------------------------- PAUL D. MERINGOLO CHIEF EXECUTIVE OFFICER AND PRESIDENT PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON JUNE 22, 2001 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED: /S/ PAUL D. MERINGOLO CHIEF EXECUTIVE OFFICER, PRESIDENT AND ---------------------------- DIRECTOR PAUL D. MERINGOLO /S/ RICHARD G. SATIN VICE PRESIDENT-OPERATIONS, GENERAL COUNSEL, ---------------------------- CORPORATE SECRETARY AND DIRECTOR RICHARD G. SATIN /S/ BERNARD WENGROVER DIRECTOR ---------------------------- BERNARD WENGROVER /S/ PHILIP F. CORSO DIRECTOR ---------------------------- PHILIP F. CORSO /S/ THOMAS A. NICOSIA DIRECTOR ---------------------------- THOMAS A. NICOSIA 15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE STOCKHOLDERS AND BOARD OF DIRECTORS MEDICAL ACTION INDUSTRIES INC. IN CONNECTION WITH OUR AUDIT OF THE FINANCIAL STATEMENTS OF MEDICAL ACTION INDUSTRIES INC. REFERRED TO IN OUR REPORT DATED MAY 18, 2001, WHICH IS INCLUDED IN THE ANNUAL REPORT TO SHAREHOLDERS AND INCORPORATED BY REFERENCE IN PART II OF THIS FORM, WE HAVE ALSO AUDITED SCHEDULE II FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED MARCH 31, 2001. IN OUR OPINION, THIS SCHEDULE, WHEN CONSIDERED IN RELATION TO THE BASIC FINANCIAL STATEMENTS TAKEN AS A WHOLE, PRESENTS FAIRLY, IN ALL MATERIAL RESPECTS, THE INFORMATION REQUIRED TO BE SET FORTH THEREIN. GRANT THORNTON LLP MELVILLE, NEW YORK MAY 18, 2001 16 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2001 ----------------- MEDICAL ACTION INDUSTRIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) EXHIBIT INDEX ================================================================================ EXHIBIT NO. 23 CONSENT OF GRANT THORNTON LLP. 99 ADDITIONAL EXHIBIT - UNDERTAKINGS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS WE CONSENT TO THE INCORPORATION BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2001 OF OUR REPORT DATED MAY 18, 2001, INCLUDED IN THE 2001 ANNUAL REPORT TO STOCKHOLDERS OF MEDICAL ACTION INDUSTRIES INC. WE ALSO CONSENT TO THE INCORPORATION BY REFERENCE IN THE REGISTRATION STATEMENT (FORM S-8 NO. 33-11046) PERTAINING TO THE 1984 INCENTIVE STOCK OPTION PLAN AND RESTRICTED MANAGEMENT STOCK BONUS PLAN AND REGISTRATION STATEMENTS (FORM S-8 NO. 33-41765, FORM S-8 NO. 33-66038, FORM S-8 NO. 333-14993 AND FORM S-8 NO. 333-65585) PERTAINING TO THE 1989 NON-QUALIFIED STOCK OPTION PLAN AND THE 1994 STOCK INCENTIVE PLAN AND REGISTRATION STATEMENT (FORM S-8 NO. 333-35015) PERTAINING TO THE 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN OF MEDICAL ACTION INDUSTRIES INC. OF OUR REPORTS DATED MAY 18, 2001, INCLUDED AND INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-K OF MEDICAL ACTION INDUSTRIES INC. FOR THE YEAR ENDED MARCH 31, 2001. GRANT THORNTON LLP MELVILLE, NEW YORK MAY 18, 2001 EXHIBIT 99 THE FOLLOWING UNDERTAKINGS ARE INCORPORATED INTO THE COMPANY'S REGISTRATION STATEMENTS ON FORM S-8 (REGISTRATION NOS. 33-11046, 33-41765, 33-66038, 333-14993, 333-35015 AND 333-65585). (A) THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES: (1) TO FILE, DURING ANY PERIOD IN WHICH OFFERS OR SALES ARE BEING MADE, A POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT. (I) TO INCLUDE ANY PROSPECTUS REQUIRED BY SECTION 10(A)(3) OF THE SECURITIES ACT OF 1933; (II) TO REFLECT IN THE PROSPECTUS ANY FACT OR EVENTS ARISING AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT (OR THE MOST RECENT POST-EFFECTIVE AMENDMENT THEREOF) WHICH, INDIVIDUALLY OR IN THE AGGREGATE, REPRESENT A FUNDAMENTAL CHANGE IN THE INFORMATION SET FORTH IN THE REGISTRATION STATEMENT; (III) TO INCLUDE ANY MATERIAL INFORMATION WITH RESPECT TO THE PLAN OF DISTRIBUTION NOT PREVIOUSLY DISCLOSED IN THE REGISTRATION STATEMENT OR ANY MATERIAL CHANGE TO SUCH INFORMATION IN THE REGISTRATION STATEMENT; PROVIDED, HOWEVER, THAT PARAGRAPHS (A)(1)(I) AND (A)(1)(II) DO NOT APPLY IF THE REGISTRATION STATEMENT IS ON FORM S-3 OR FORM S-8, AND THE INFORMATION REQUIRED TO BE INCLUDED IN A POST-EFFECTIVE AMENDMENT BY THOSE PARAGRAPHS IS CONTAINED IN PERIODIC REPORTS FILED BY THE REGISTRANT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 THAT ARE INCORPORATED BY REFERENCE IN THE REGISTRATION STATEMENT. (2) THAT, FOR THE PURPOSE OF DETERMINING ANY LIABILITY UNDER THE SECURITIES ACT OF 1933, EACH SUCH POST-EFFECTIVE AMENDMENT SHALL BE DEEMED TO BE A NEW REGISTRATION STATEMENT RELATING TO THE SECURITIES OFFERED THEREIN, AND THE OFFERING THEREOF. (3) TO REMOVE FROM REGISTRATION BY MEANS OF A POST-EFFECTIVE AMENDMENT ANY OF THE SECURITIES BEING REGISTERED WHICH REMAIN UNSOLD AT THE TERMINATION OF THE OFFERING. (B) THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES THAT, FOR PURPOSES OF DETERMINING ANY LIABILITY UNDER THE SECURITIES ACT OF 1933, EACH FILING OF THE REGISTRANT'S ANNUAL REPORT PURSUANT TO SECTION 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (AND, WHERE APPLICABLE, EACH FILING OF AN EMPLOYEE BENEFIT PLAN'S ANNUAL REPORT PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934) THAT IS INCORPORATED BY REFERENCE IN THE REGISTRATION STATEMENT SHALL BE DEEMED TO BE A NEW REGISTRATION STATEMENT RELATING TO THE SECURITIES OFFERED THEREIN, AND THE OFFERING OF SUCH SECURITIES AT THAT TIME SHALL BE DEEMED TO BE THE INITIAL BONA FIDE OFFERING THEREOF. INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF THE REGISTRANT PURSUANT TO THE FOREGOING PROVISIONS, OR OTHERWISE, THE REGISTRANT HAS BEEN ADVISED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE, UNENFORCEABLE. IN THE EVENT THAT A CLAIM FOR INDEMNIFICATION AGAINST SUCH LIABILITIES (OTHER THAN THE PAYMENT BY THE REGISTRANT OF EXPENSES INCURRED OR PAID BY A DIRECTOR, OFFICER OR CONTROLLING PERSON OF THE REGISTRANT IN THE SUCCESSFUL DEFENSE OF ANY ACTION, SUIT OR PROCEEDING) IS ASSERTED BY SUCH DIRECTOR, OFFICER OR CONTROLLING PERSON IN CONNECTION WITH THE SECURITIES BEING REGISTERED, THE REGISTRANT WILL, UNLESS IN THE OPINION OF ITS COUNSEL THE MATTER HAS BEEN SETTLED BY CONTROLLING PRECEDENT, SUBMIT TO A COURT OF APPROPRIATE JURISDICTION THE QUESTION WHETHER SUCH INDEMNIFICATION BY IT IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND WILL BE GOVERNED BY THE FINAL ADJUDICATION OF SUCH ISSUE. S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS MEDICAL ACTION INDUSTRIES INC.

--------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E --------------------------------------------------------------------------------------------------------------------------- ADDITIONS --------- ADDITIONS CHARGED TO BALANCE AT CHARGED TO OTHER OTHER CHANGES BALANCE BEGINNING COSTS AND ACCOUNTS- - ADD(DEDUCT) END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED MARCH 31, 2001 $156,998 $36,000 - $192,998 DEDUCTED FROM ASSET ACCOUNTS: ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR ENDED MARCH 31, 2000 $128,998 $28,000 - $156,998 DEDUCTED FROM ASSET ACCOUNTS: ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR ENDED MARCH 31, 1999 DEDUCTED FROM ASSET ACCOUNTS: ALLOWANCE FOR DOUBTFUL ACCOUNTS $117,086 $27,000 ($15,088) (1) $128,998 ------------------- (1) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ---------------------------------------------------------------------------------------------------------------------------