-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DGbiOhI/tB/lE0E0GQdUqF3NYRCZbZDsRXEzjGX7xGnPuw+NeemvpkPmHvWA8KUX v7VYrIzzNZOj/gayHeUrrw== 0000889812-96-000742.txt : 19960626 0000889812-96-000742.hdr.sgml : 19960626 ACCESSION NUMBER: 0000889812-96-000742 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960625 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL ACTION INDUSTRIES INC CENTRAL INDEX KEY: 0000748270 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 112421849 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13251 FILM NUMBER: 96585263 BUSINESS ADDRESS: STREET 1: 150 MOTOR PKWY CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162314600 MAIL ADDRESS: STREET 2: 150 MOTOR PKWY CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 ANNUAL REPORT 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, 1996 (Fee Required) or [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) 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) 150 Motor Parkway, Hauppauge, New York 11788 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (516)231-4600 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Class which Registered 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 ___ No X 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, $.001 par value, held by nonaffiliates of the registrant as of June 1, 1996 was approximately $12,760,000 based on the closing price on that date on the NASDAQ-National Market System. As of June 1, 1996, registrant had outstanding 8,199,789 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 1996 Annual Meeting of Stockholders and (2) registrant's Annual Report to Stockholders for the fiscal year ended March 31, 1996. 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. Laparotomy sponges and operating room towels, the Company's core business, are produced from cotton and used for a multitude of purposes during operating room procedures. To compliment these products, Medical Action introduced a line of gauze sponges, gauze fluffs, dry burn dressings and non-adherent gauze dressings. Gauze sponges and/or fluffs are used in all health care facilities including hospitals, health maintenance organizations, dental facilities and veterinary centers. Gauze fluffs are pre-folded gauze squares used for compression in soft tissue surgery. Dry burn dressings are composed of multiple layers of folded gauze that are typically customized for hospitals as to size, weave, folds, stitching and packaging. Non-adherent dressings reduce sticking and skin removal during dressing changes, thereby alleviating trauma and pain to the wound site. The Company introduced during fiscal 1995 a line of specialty sponges, including eye spears, dissecting, stick and tonsil sponges, all of which are used in a variety of surgical procedures. In August 1994, the Company acquired the disposable surgical products business of QuanTech, Inc. in consideration of the assumption of specified liabilities and the issuance of 453,000 unregistered shares of Medical Action Common Stock. Up to an additional 250,000 unregistered shares of Medical Action Common Stock may be issued, provided that the continued operations of QuanTech generate a minimum of $1,756,000 of gross margin profit during a consecutive twelve month period through July 1996. Management does not believe that such additional shares will be issued. 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. QuanTech 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 purchase price for the acquired assets consisted of $25,000 in cash (which was paid at closing) and a Promissory Note in the amount of $855,793, which is payable in four (4) equal monthly installments commencing on March 1, 1996, subject, however, to reduction depending on the actual collections by the Registrant of the purchased accounts receivable. In addition, the Company agreed to purchase approximately $527,000 of SBW inventory on a consignment basis through August 1, 1996 and is required to purchase substantially all remaining unsold inventory at that time. 2 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. Management's growth strategy is to focus its resources on entering new markets for its existing product lines, including alternate care, 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. Through its existing direct sales force, manufacturers' representatives and internal sales department, the Company's products are sold throughout the United States and internationally. The Company intends to utilize these sales channels to expand its product lines to include both surgical and non-surgical products. 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, 1996, 1995 and 1994, laparotomy sponges accounted for 48%, 44% and 53%, respectively, of the Company's total sales. Absorbent Operating Room Towels - In January 1986, the Company introduced ACTI-SORB(Trademark), a line of cotton absorbent operating room towels, which 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, 1996, 1995 and 1994, operating room towels accounted for 32%, 37% and 32%, respectively, of the Company's total sales. 3 Gauze Sponges - To round out its wound dressing line, the Company developed a line of gauze sponges and gauze fluffs. The Company believes that its brand recognition in the laparotomy sponge field will pave the way for its entrance into the gauze sponge market. 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 in soft tissue surgery. 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, stitching and packaging. The non-adherent dressings reduce sticking and skin removal during dressing changes, thereby alleviating trauma and pain to the wound site. Specialty Sponges - In fiscal 1995, the Company introduced a line of specialty sponges as 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. (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. 4 Disposable Surgical Light Handle Covers - Light Shields(Trademark) - A patented design assures a secure fit and acts as a sterile barrier on surgical light handles in the operating room. Light shields(Trademark) 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 which adhere to most surfaces in an operating room environment 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. Laboratory Specimen Transport Bags - Used to collect and transport laboratory specimens. The bag features 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. 5 Trademarks and Patents The Company owns numerous trademarks. While it considers that in the aggregate the trademarks are important in the operation of its business, it does not consider that any of its trademarks, or any group of them, are of such importance that termination would materially affect its business. The Company has a United States Patent (No. 4976299) for its surgical light handle cover which expires in 2007. Although there is no assurance that other companies will not be successful in developing similar products without violating the rights of the Company, management believes that the loss of this patent could adversely affect the Company's ability to market this product. 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 Kendall Healthcare Products Company and Medline Industries, Inc. are major competitors, Medical Action's sales represent a significant share of the domestic market. In June 1992 the Company entered into a three-year agreement with Baxter for the purchase of Medical Action disposable sterile laparotomy sponges. The agreement has been extended through June 1997. The Company's primary competitors in the sale of sterile operating room towels, in which the Company is a leading supplier, are Baxter Surgical Products Division of Baxter Healthcare Corp., Medline Industries, Inc. and DeRoyal, Inc. In the sale of medical pouches, where the Company is one of the leading suppliers, the Company's primary competitors include Tower Medical. 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. Effects of Health Care Reform Proposed health care legislation, if enacted, could contain provisions intended to reform the availability, delivery and financing of health care in the United States. Such proposed legislative packages mandate universal coverage for all legal U.S. residents and control over health care costs. While the Company cannot predict whether any health care reform legislation will be approved or what effect, if any, that such health care reform legislation will have on the Company or its operations, the Company believes that based on the Company's understanding of current proposals, health care legislation may have some beneficial effects on its business by increasing the availability of health care. 6 Regulation The manufacture and marketing of medical devices are regulated under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act as administered by the Food and Drug Administration ("FDA"). The FDA considers the Company's current products to be medical devices. The FDA has the authority to determine the safety and effectiveness of all new medical devices introduced into interstate commerce and to grant approval to applications to market such products on a national basis. If a new product is substantially equivalent (such term being used on safety and intended use equivalence rather than indicating a similarity in technology) to approved products that are commercially available, a "510(K)" pre-market notification to the FDA is required before the product may be commercially marketed. The FDA has ninety (90) days to respond to a pre- market notification and, after satisfaction of all FDA comments, the Company can market the product in the United States. All of the Company's products have been approved to market under 510(K) notifications. The Company believes that its proposed products are also considered medical devices. However, there can be no assurance that the FDA will choose to characterize future products as medical devices. Any such change in FDA characterization would potentially involve a more lengthy procedure, including detailed laboratory, clinical testing, and sampling activities. Compliance with current Good Manufacturing Practices ("GMP") regulations is necessary to receive FDA approval to market new products and to continue to market current products. The Company's manufacturing, quality control and quality assurance procedures and documentation are inspected and evaluated periodically by the FDA. Marketing and Distribution The Company's products are presently marketed and sold throughout the United States through a network of direct sales personnel and manufacturers' representatives. There are approximately 20 manufacturers' representatives and 18 direct sales personnel throughout the United States engaged in the sales and marketing of the Company's products. Sales are primarily made to distributors, who maintain sufficient inventory to service customer requirements. The Company's distribution network is comprised of hospital distributors, alternate care distributors, veterinary distributors, dental distributors and industrial safety distributors covering the entire United States and Canadian marketplace. 7 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. For the fiscal year ended March 31, 1996, no single customer accounted for more than 10% of the Company's net sales, except for Owens & Minor, Inc., Baxter Healthcare Hospital Supply Division and General Medical Corporation, which accounted for approximately 23%, 21% and 10%, respectively, of total net sales. For the fiscal year ended March 31, 1995, Baxter Healthcare Hospital Supply Division (19%), and Owens and Minor, Inc. (19%) were the only customers that accounted for more than 10% of total net sales. The Company's ten largest customers accounted for approximately 80% of its net sales in fiscal 1996. 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 $291,000, $211,000 and $328,000 for the fiscal years ended March 31, 1996, 1995 and 1994, respectively. Employees As of June 1, 1996, the Company had 170 full-time employees with 126 in manufacturing and distribution, 27 in marketing and sales, and 17 in administration. None of the Company's employees are represented by a labor union. The Company believes that its employee relations are satisfactory. 8 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, foam, medical grade magnets and a variety of packaging material. The Company presently purchases its principal raw materials primarily from the Peoples Republic of China. The Company is currently exploring alternate sources of supply for those raw materials. The Company's operating room towels 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. 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 five to seven days, the Company must maintain sufficient inventories of all products at all times. Manufacturing The Company currently purchases its laparotomy sponges, burn dressings and operating room towels from the Peoples Republic of China, including two joint venture facilities. During the past fiscal year, the Company also purchased certain of these products, to a lesser extent, from Mexico and the Dominican Republic. These joint ventures were entered into in fiscal 1990. Prior to the formation of these joint ventures, the Company purchased its laparotomy sponges and operating room towels from these factories. The joint venture factories are located in Wu Jiang and Lin Hai, which are rural areas of China. After these products are manufactured, they are shipped to the Company's domestic manufacturing facilities located in Asheville, North Carolina, where they are packaged and sterilized. Upon completion of the acquisition of the disposable surgical products business of QuanTech, Inc. in August 1994 and sterilization packaging business of Lawson Mardon Medical Products, Inc. in January 1996, the operations of the QuanTech and Lawson Mardon product lines were transferred to the Company's Asheville, North Carolina facilities. As a result of our efforts to develop a new protocol for sterilization of certain of its cotton products, in November 1993 the Company developed a decontamination cycle to its sterilization process. This decontamination process, which utilizes gamma radiation, is conducted by independent outside contract facilities prior to packaging and sterilization in Asheville, North Carolina. The Company owns substantially all of its manufacturing and ethylene oxide sterilization equipment. 9 ITEM TWO - PROPERTIES The Company occupies approximately 100,400 square feet of manufacturing, general office and warehouse space at its facilities in North Carolina and New York under real estate leases expiring through fiscal 1999, with aggregate minimum annual rental commitments of approximately $502,200. The Company also owns a 52,000 square foot manufacturing facility in Asheville, North Carolina. 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 Asheville, North Carolina manufacturing 52,000 (a) Fletcher, North Carolina warehouse/distribution 70,000 (b) Asheville, North Carolina manufacturing/warehouse 17,000 (c) Farmingdale, New York warehouse 6,000 (d) Hauppauge, New York executive offices 7,400 (e) - ------------------------- (a) The principal manufacturing facility of the Company is located on premises which the Company owns in Asheville, North Carolina. A mortgage in the amount of approximately $997,000 was outstanding as of March 31, 1996. (b) The lease may be terminated by the Company or the landlord on nine (9) months prior written notice. The current annual rental is $272,000. (c) Premises are leased through January 31, 1997 at an annual rental of $34,700. (d) Premises are leased through March 31, 1997 at an annual rental of $33,000. (e) Premises are leased through February 28, 2001 at a current annual rental of $162,500. ITEM THREE - LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or to which any of their property is subject. 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. 10 PART II ITEM FIVE - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the captions "Selected Financial Data" and "Stock Trading" on page 1 and the inside back cover, respectively, of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM SIX - SELECTED FINANCIAL DATA The information contained under the caption "Selected Financial Data" on page 1 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 5 and 6 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiary, which appear on pages 7 through 15 of the Company's 1996 Annual Report to Stockholders, and the report thereon of Ernst & Young LLP dated May 24, 1996, appearing on page 16 of such Annual Report, are incorporated herein 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 1996, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year ended March 31, 1996. 11 PART IV ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) and (2) List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of Medical Action Industries Inc. and subsidiary, included in the annual report of the Company to its stockholders for the year ended March 31, 1996, are incorporated by reference in Item 8: Consolidated Balance Sheets at March 31, 1996 and 1995 Consolidated Statements of Operations for the Years Ended March 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements The following consolidated financial statement schedule of Medical Action Industries Inc. and subsidiary is included in Item 14(d): 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. 12 (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). 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). 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 Incentive Stock Option Plan, as amended (Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988). 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, 1995). 10.5 Employment Agreement dated as of February 1, 1993 between the Registrant and Paul D. Meringola (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. Meringola (Exhibit 10 to the Company's Current Report on Form 8-K dated February 7, 1996). 10.7 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). 13 10.8* Third Amended and Restated Revolving Credit Note and Agreement between the Registrant and a lending institution dated as of October 24, 1995. 10.9 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* Consent of Ernst & Young LLP. 27* Financial Data Schedule 99* Additional Exhibit - Undertakings (b) Reports on Form 8-K: (a) Current Report on Form 8-K dated February 5, 1996 covering Item 5 - Other Events, Item 6 - Resignation of Registrant's Directors and Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits. (b) Current Report on Form 8-K dated February 6, 1996 covering Item 2 - Acquisition or Disposition of Assets and Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits. (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, 1996 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 the 5th day of June, 1996. MEDICAL ACTION INDUSTRIES INC. By: s/ Paul D. Meringola --------------------- Paul D. Meringola President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on June 5, 1996 by the following persons in the capacities indicated: s/ Joseph R. Meringola Chairman of the Board - ------------------------ (Chief Executive Officer) Joseph R. Meringola s/ Paul D. Meringola President - ------------------------ (Chief Operating Officer) Paul D. Meringola and Director 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 - ------------------------ Dr. Philip F. Corso s/ Thomas A. Nicosia Director - ------------------------ Dr. Thomas A. Nicosia 15 S-1 Schedule II - Valuation and Qualifying Accounts Medical Action Industries Inc. and Subsidiary
- -------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - -------------------------------------------------------------------------------------------------------------------------------- ADDITIONS - -------------------------------------------------------------------------------------------------------------------------------- Additions Charged to Other Balance at Charged to Other Changes- Balance at Beginning Costs and Accounts- Add (Deduct) End Description of Period Expenses Describe Describe of Period - ------------------------------------------------------------------------------------------------------------------------------- Year ended March 31, 1996 Deducted from asset accounts: Allowance for doubtful accounts $110,953 $110,953 Year ended March 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts 110,953 110,953 Year ended March 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts 110,953 110,953
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, 1996 ------------------ MEDICAL ACTION INDUSTRIES INC. (Exact name of registrant as specified in its charter) EXHIBIT INDEX Exhibit No. 10.8 Third Amended and Restated Revolving Credit Note and Agreement between the Registrant and a lending institution dated as of October 24, 1995. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule 99 Additional Exhibit - Undertakings EX-10.8 2 REVOLVING CREDIT NOTE AND AGREEMENT EXHIBIT 10.8 EUROPEAN AMERICAN BANK THIRD AMENDED AND RESTATED REVOLVING CREDIT NOTE AND AGREEMENT The within is an amendment and restatement of that certain Amended and Restated Revolving Credit Note and Agreement in the principal amount of $9,000,000 dated November 8, 1993 and executed by the Borrower as hereinafter defined; said Note having been previously amended and restated by a Second Amended and Restated Revolving Credit Note and Agreement in the principal amount of $10,000,000 dated August 9, 1994; said Note having been previously modified by a Note Modification Agreement dated February 10, 1995. October 24, 1995 $10,000,000 Office Address: 730 Veterans Memorial Highway Hauppauge, NY 11788 FOR VALUE RECEIVED, MEDICAL ACTION INDUSTRIES INC. (the "Borrower") promises to pay to the order of EUROPEAN AMERICAN BANK (the "Bank") on or before September 30, 19998 at the office of the Bank located at the place first above stated or such other place as the holder hereof may from time to time designate in writing, in lawful money of the United States of America in immediately available funds, the principal sum of Ten Million ($10,000,000) Dollars (or such lesser amount as may then be the aggregate unpaid principal balance of all loans made by the Bank to the Borrower hereunder (each a "Loan" and collectively the "Loans"). The Borrower also promises to pay interest (computed on the basis of a 360 day year for acutal days elapsed) at said office in like money on the unpaid principal amount hereof from time to time outstanding from the date hereof until maturity at the rate of one-quarter of one (0.25%) percent per annum in excess of the Bank's Prime Rate (the rate stated by the Bank to be its prime rate as in effect from time to time), which interest rate shall change when and as the Prime Rate changes. Interest shall be payable monthly on the first day of each month commencing on the first such day to occur after the date hereof and upon payment in full of the unpaid principal amount hereof. If any payment of principal or interest becomes due on a day on which banks in New York, New York are required or permitted by law to remain closed, such payment may be made on the next succeeding business day on which such banks are open, and such extensions shall be included in computing interest in connection with such payment. The Borrower further agrees that this Note shall bear interest after any stated or accelerated maturity hereof at a rate of three (3%) percent per annum in excess of the rate hereinbefore provided for, payable on demand. In no event shall interest payable hereunder to be in excess of the maximum rate of interest permitted under applicable law. The Borrower authorizes the Bank to charge any of the Borrower's accounts for payments of principal and interest hereunder. In consideration of the granting of the Loans evidenced by this Note, the Borrower hereby agrees as follows: 1. Revolving Credit Commitment. (a) The loan evidenced by this Note is available in one or more advances (each a "Loan" and collectively the "Loans") during the period which commences on the date hereof and ends on September 30, 1998 (the "Credit Period") in an aggregate principal amount up to, but not exceeding at any time outstanding, the said principal sum of Ten Million ($10,000,000) Dollars (the "Commitment"). During the Credit Period, the Borrower may use the Commitment by borrowing, prepaying in whole or in part and reborrowing, on a revolving basis, all in accordance with the terms and conditions hereof; provided, however, that each such Loan or prepayment be in an amount not less than One Hundred Thousand ($100,000) Dollars. (b) The date and amount of each Loan and of each payment of principal shall be maintained by the Bank in its books and records at the time of each Loan or payment. All such notations shall be presumed to be correct and the aggregate net unpaid amount of Loans set forth therein shall be presumed to be the principal balance hereof, except for manifest error. (c) Each request for a Loan shall be subject to the satisfaction of the following conditions precedent: (i) The Borrower shall have given the Bank notice of such request, setting forth the amount of the Loan requested and the date thereof. Such notice may be written or oral and shall be sufficient if received by 1 p.m. of the date the Loan is requested. If the request is oral it shall be thereafter confirmed in writing by the Borrower by telecopier to the Bank. (ii) No Event of Default, or event which would be an Event of Default but for the giving of notice or the passage of time or both, has occurred and is continuing; and all of the representations and warranties made by the Borrower in Section 4 hereof shall be true and correct on and as of the date of such request as if made on and as of such date. (d) The outstanding principal balance of the Loans shall at no time exceed the lesser of the Commitment or the aggregate amount available under the following Borrowing Base (as such amount shall fluctuate from time to time): (i) an amount equal to eighty (80%) percent of the Borrower's "Eligible Accounts Receivable", which shall be defined as all accounts of the Borrower, less: (w) uncollectible accounts; (x) accounts remaining unpaid after a date which is ninety (90) days after invoice date (120 days in the case of accounts due from hospitals); (y) accounts of account debtors of which at least twenty-five (25%) percent of the sum of such accounts remain unpaid after a date which is 90 days after invoice date (120 days in the case of accounts due from hospitals); and (z) maximum discounts, rebates, credits and allowances which may be taken by or granted to account debtor; plus (ii) an amount equal to fifty-five (55%) percent of the purchase price of inventory acquired pursuant to commercial letters of credit (each and "L/C" and collectively the "L/Cs") issued hereunder; plus (iii) the lesser of $5,000,000 (or $6,500,000 during the months of April through August, inclusive), or the amount equal to fifty-five (55%) percent of the market value of "Eligible Inventory" on hand. Eligible Inventory shall be defined as raw materials, inventory in transit, all finished goods and shall not include work in process, packaging material and inventory held outside the territorial jurisdiction of the United States of America. (e) Sublimits under the Commitment are available to the Borrower in an amount equal to the lesser of the Borrowing Base or $2,000,000 each for documentary Letters of Credit ("L/C"), $400,000 for Standby L/C's and $4,000,000 for banker's acceptances (each an "Acceptance" and collectively the "Acceptances"). For any advance made for an L/C, the Borrower shall pay one-quarter of one (0.25%) percent upon each of the opening and negotiation of the L/C. For each Standby L/C the Borrower shall pay a fee equal to one and one-half (1.5%) percent per annum upon the issuance of the Standby L/C. For any advance made for an Acceptance, the Borrower shall pay a fee equal to one and one-half (1.5%) percent per annum upon the issuance of the Acceptance. Each L/C shall have a maximum tenor of one (1) year, and shall be evidenced by the Bank's standard letter of credit agreement. Each Standby L/C shall have a maximum tenor of one hundred eighty (180) days, and shall be evidenced by the Bank's standard standby letter of credit agreement. Acceptances have a maximum tenor of one hundred eighty (180) days and shall be evidenced by the Bank's standard acceptance credit agreement. (f) Notwithstanding anything to the contrary herein contained, the amount available for direct borrowings under the Commitment, as set forth in Subsection 1(d) hereof, shall be reduced by any and all amounts outstanding pursuant to the borrowing sublimit set forth in Subsection 1(e) hereof. 2. Commitment Fee. As additional compensation for providing the Loans described herein, the Borrower agrees to pay the Bank a commitment fee for the Credit Period at the rate of one-quarter of one (0.25%) percent per annum on the average daily unused portion of the Commitment. Such commitment fee shall be payable quarterly, on the first day of each December, February, May and August during the Credit Period commencing December 1, 1995. 3. Conditions Precedent. Prior to the first Loan, the Borrower shall satisfy the following conditions precedent including delivery to the Bank of the following: (a) A favorable written opinion, dated of even date herewith, of the Borrower's counsel (which counsel must be satisfactory to the Bank) with respect to the matters set forth in Section 4 hereof with the exception of Subsection 4(g); (b) A copy of the resolutions passed by the Borrower's Board of Directors certified by its Secretary as being in full force and effect on the date of this Agreement, authorizing the Loan herein provided for, the execution, delivery and performance of this Note and any other instrument or agreement required hereunder and containing a certificate of incumbency as to the person or persons authorized to execute and deliver the same; (c) Evidence that the Bank has been named as loss payee on the insurance maintained by the Borrower on its inventory. Said insurance policy shall be issued by a financially sound and reputable insurance company reasonably satisfactory to the Bank; (d) Copies of the Borrower's certificate of incorporation, and a certificate of good standing dated not more than sixty (60) days prior to the date hereof; (e) The Bank shall have received at the closing the sum of Forty Thousand ($40,000) Dollars which represents the facility fee due from the Borrower. 4. Representations And Warranties. The Borrower hereby represents and warrants to the Bank that: (a) It is duly organized, validly existing and in good standing under the laws of the state of its incorporation and is qualified to do business and in good standing under the laws of each state where its failure to so qualify would have a material adverse effect on its business, operations or properties. (b) This Note has been duly authorized, executed and delivered and constitutes the valid and legally binding obligation of the Borrower, enforceable in accordance with its terms. (c) The execution and delivery of this Note and performance hereunder will not violate any provision of law. (d) There are no actions or proceedings pending before any court or governmental authority, bureau or agency with respect to or threatened against or affecting the Borrower, or any Subsidiary, which if determined adversely would have a material adverse effect on the business, the assets or the financial condition of the Borrower or any Subsidiary. As used herein, the term "Subsidiary" or "Subsidiaries" means any corproation or corporations of which the Borrower alone, or the Borrower and/or one or more of its Subsidiaries, owns, directly or indirectly, at least a majority of the securities having ordinary voting power for the election of directors. (e) Neither the Borrower nor any Subsidiary is in default under, or in violation of, any term of any agreement, ordinance, resolution, decree, bond, note, indenture, or judgment to which it is a party or by which it is bound, or by which any of the properties or assets owned by it or used in the conduct of its business is affected, which default or violation may have a material adverse effect on the business, the assets or the financial condition of the Borrower or any Subsidiary. The operations of the Borrower and each Subsidiary comply in all respects with all laws, ordinances and regulations applicable to them. (f) Neither the Borrower nor any Subsidiary is a party to or bound by, nor are any of the properties or assets owned by it or used in the conduct of its business affected by, any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment, or subject to any charter or other corporate restriction, which materially and adversely affects the business or financial condition of the Borrower or any Subsidiary. (g) All balance sheets, profit and loss statements and other financial information heretofore furnished to the Bank are true, correct and complete and present fairly the financial condition of the Borrower and its Subsidiaries as at the dates thereof and for the periods covered thereby, including contingent liabilities of every kind, which financial condition has not materially adversely changed since the date of the most recently dated balance sheets of the Borrower heretofore furnished to the Bank. (h) No part of the proceeds of the Loans will be used directly or indirectly for the purpose of purchasing or carrying, or for payments in full or in part of indebtedness which was incurred for the purpose of purchasing or carrying, any margin stock as such term is defined in Sec. 221.2 of Regulation U of the Board of governors of the Federal Reserve System. (i) The Borrower and its Subsidiaries are in compliance in all material respects with the Employee Retirement Income Security Act of 1974 ("ERISA") and all rules and regulations thereunder. Neither the Borrower nor any of its Subsidiaries has any unfunded vested liability under any type of plan described in Section 4021(a) of ERISA ("Plan") and no reportable event, as set forth in section 4043(b) of ERISA, has occurred or is continuing with respect to any Plan. 5. Financial Statements. The Borrower shall deliver to the Bank: (a) Annually, as soon as available, but in any event within 120 days after the last day of each of its fiscal years, the consolidated and consolidating balance sheet of the Borrower, as at such last day of the fiscal year, and consolidated and consolidating statements of income, retained earnings and cash flows for such fiscal year, prepared in accordance with generally accepted accounting principles consistently applied, in reasonable detail. The consolidated statements delivered pursuant to this Section 5(a) shall be certified without qualification by a firm of independent certified public accountants satisfactory to the Bank and the consolidating statements shall be internally prepared by the Borrower. (b) As soon as available, but in any event within 60 days after the end of each of its fiscal quarters, the 10-Q report filed or to be filed with the Securities and Exchange Commission, and the consolidated and consolidating balance sheet of the Borrower as at the last day of such fiscal quarter, and consolidated and consolidating statements of income, retained earnings and cash flows for the portion of the fiscal year through such date, all in reasonable detail, each such statement to be prepared in accordance with generally accepted accounting principles consistently applied. The consolidated statements and the consolidating statements referred to herein shall be internally prepared by the Borrower. (c) Promptly after a written request therefor, such other financial data or information as the Bank may reasonably request from time to time. (d) At the same time as it delivers the financial statements required under the provisions of Subsections 5(a) and 5(b), a certificate signed by the president and principal accounting officer of the Borrower, to the effect that no Event of Default hereunder or under any other agreement to which the Borrower or any Subsidiary is a party or by which it is bound, or by which any of its properties or assets may be affected, and no event which, with the giving of notice or the lapse of time, or both, would constitute such an Event of Default, has occurred. 6. Affirmative Covenants. The Borrower will, and with respect to the agreements set forth in Subsections 6(a) through 6(f) hereof, will cause each Subsidiary to: (a) with respect to its properties, assets and business, maintain insurance against loss or damage, to the extent that property, assets and businesses of similar character are usually so insured by companies similarly situated and operating like properties, assets or businesses with responsible insurance companies satisfactory to the Bank; such insurance to be endorsed to name the Bank as loss payee; (b) duly pay and discharge all taxes or other claims which might become a lien upon any of its property except to the extent that such items are being in good faith appropriately contested; (c) maintain, preserve and keep its properties in good repair, working order and condition, and make all reasonable repairs, replacements, additions, betterments and improvements thereto; (d) conduct its business in substantially the same manner and in substantially the same fields as such business is now carried on and conducted; (e) comply with all statutes, rules and regulations and maintain its corporate existence; (f) permit the Bank to make or cause to be made, semi-annual field audits of any books, records and papers of the Borrower at the Borrower's sole cost and expense at times reasonably required by the Bank, and to permit the Bank to make such other audits of its books, records and papers at the Bank's expense at all such reasonable times and as often as the Bank may require; (g) use the proceeds of the Loans for the following purposes and for no other purpose: To finance any inventory purchases by and accounts receivable of the Borrower, and to refinance any amounts outstanding under an existing line of credit provided to the Borrower from the Bank; (h) deliver to the Bank, as soon as available, but in any event within 60 days after the end of each of its fiscal quarters, a certificate signed by the president and principal accounting officer, certifying the value of the Borrower's Eligible Accounts Receivables and Inventory; (i) deliver to the Bank, as soon as available, but in any event within 15 days after the end of each calendar month, borrowing base certificates, accounts receivable aging and inventory schedules all in form and substance satisfactory to the Bank. (j) maintain a minimum Capital Base ("Capital Base") (to be equal to the sum of capital surplus, earned surplus and capital stock minus deferred charges, intangibles, treasury stock, officer and employee loans receivable, and joint venture investments and advances and assets held for disposition) of not less than the following: Period Minimum Capital Base March 31, 1995 through March 30, 1996 $ 8,200,000 March 31, 1996 through March 30, 1997 $ 8,650,000 March 31, 1997 through March 30, 1998 $ 9,500,000 March 31, 1998 through Maturity $10,250,000 (k) maintains a Current Ratio, the ratio of current assets to current liabilities (current liabilities shall include all borrowings hereunder) of not less than the following: Period Minimum Current Ratio March 31, 1995 through March 30, 1996 1.4:1 March 31, 1996 through March 30, 1997 1.4:1 March 31, 1997 through March 30, 1998 1.5:1 March 31, 1998 through Maturity 1.7:1 (l) maintain a minimum Working Capital, the excess of current assets over current liabilities (current liabilities to include all borrowings hereunder) of not less than the following: Period Minimum Working Capital March 31, 1995 through March 30, 1996 $ 5,500,000 March 31, 1996 through March 30, 1997 $ 5,500,000 March 31, 1997 through March 30, 1998 $ 6,500,000 March 31, 1998 through Maturity $ 7,500,000 (m) maintain a maximum ratio of total unsubordinated liabilities ("TUL") to Capital Base of not greater than the following: Period Minimum TUL to Capital Base March 31, 1995 through March 30, 1996 1.75:1 March 31, 1996 through March 30, 1997 1.6:1 March 31, 1997 through March 30, 1998 1.4:1 March 31, 1998 through Maturity 1.2:1 (n) maintain at each fiscal year end a ratio of Earnings Before Interest and Taxes for each fiscal year to interest expenditure for such fiscal year of not less than 1.25:1. (o) immediately give notice to the Bank that an Event of Default has occurred or that an event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, has occurred and specifying the action which the Borrower has taken and proposes to take with respect thereto. 7. Negative Covenants. The Borrower will not, and will not permit any Subsidiary to: (a) incur, or permit to exist, any indebtedness for borrowed money, exclusive of borrowings hereunder and of any other loans made by the Bank in its discretion to the Borrower or any Subsidiary, other than existing loans for the purchase of equipment and existing indebtedness disclosed on the Borrower's balance sheet as of 6/30/95, and future purchase money loans for the purchase of equipment. (b) enter into any merger or consolidation or liquidate, wind up or dissolve itself or sell, transfer or lease or otherwise dispose of all or any substantial part of its assets (other than sales in the ordinary course of business) or acquire by purchase or otherwise the business or assets of, or stock of, another corporation; except that any Subsidiary may merge into or consolidate with any other Subsidiary which is wholly-owned by the Borrower, and any Subsidiary which is wholly-owned by the borrower may merge with or consolidate into the Borrower provided that the Borrower is the surviving corporation; (c) lend or advance money, credit or property to or invest in (by capital contribution, loan, purchase or otherwise) any firm, corporation, or other person other than existing loans made prior to March 31, 1992 or officer loans in the maximum amount of Sixty Thousand ($60,000) Dollars per officer and One Hundred Thousand ($100,000) Dollars in the aggregate, except investments in United States Government obligations and certificates of deposit of any banking institution with combined capital and surplus of at least Two Hundred Thousand ($200,000) Dollars; (d) create, assume or permit to exist, any mortgage, pledge, lien or encumbrance of or upon security interest in, any of its property or assets now owned or hereafter acquired except (i) mortgages, liens, pledges and security interests in favor of the Bank; (ii) other liens, charges and encumbrances incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not materially impair the use thereof in the operation of its business; and (iii) liens for taxes or other governmental charges which are not delinquent or which are being contested in good faith and for which a reserve shall have been established in accordance with generally accepted accounting principles; (iv) mortgage liens existing as of the date hereof; (e) assume, endorse, be or become liable for or guarantee the obligations of any person except by the endorsement of negotiable instruments for deposit or collection in the ordinary course of business; (f) declare or pay any dividends on its capital stock (other than dividends payable solely in shares of its own common stock), or purchase, redeem, retire or otherwise acquire any of its capital stock at any time outstanding, except that any Subsidiary wholly-owned by the Borrower may declare any pay dividends to the Borrower; (g) expend in excess of $750,000 per fiscal year in the aggregate for the acquisition of fixed assets for the Borrower and its Subsidiaries. (h) (i) terminate any Plan so as to result in any material liability to The Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV or ERISA (the "PBGC"), (ii) engage in or permit any person to engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended) involving any Plan which would subject the Borrower to any material tax, penalty or other liability, (iii) incur or suffer to exist any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, involving any Plan, or (iv) allow or suffer to exist any event or condition, which presents a material risk of incurring a material liability to the PBGC by reason of termination of any Plan. 8. Collateral Security. As collateral security for the payment of any and all sums owing under this Note and all other obligations, direct or contingent, joint, several or independent, of the Borrower and of any Subsidiary and each endorser or guarantor hereof now or hereafter existing, due or to become due to, or held, or to be held by, the Bank, whether created directly or acquired by assignment or otherwise (all of such obligations, including this Note, are hereinafter called the "Obligations"), the Borrower hereby grants to the Bank a first priority lien on and security interest in all of the Borrower's inventory and accounts receivable and any and all deposits or other sums at any time credited by or due from the Bank to the Borrower, whether in regular or special depository accounts or otherwise, and any and all monies, securities and other property of the Borrower, and the proceeds thereof, now or hereafter held or received by or in transit to the Bank from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and any such deposits, sums, monies, securities and other property, may at any time after the occurrence of any Event of Default be set-off, appropriated and applied by the Bank against any of the Obligations whether or not such Obligations are then due or are secured by any collateral, or, if they are so secured, whether or not such collateral held by the Bank is considered to be adequate and with respect to all collateral security by the Bank shall have all the rights and remedies available to it under the Uniform Commercial Code of New York and other applicable law. 9. Events of Default. If any one or more of the following events ("Events of Default") shall occur, the entire unpaid balance of the principal of and interest on the Obligations shall immediately become due and payable: (a) Failure to make any payment of principal or interest in respect of any of the Obligations when due; or, (b) Failure to observe any of the covenants in Sections 6 and 7 hereof; or, (c) Failure by the Borrower to perform any other term, condition or covenant of this Note or any other agreement, instrument or document delivered pursuant hereto or in connection herewith or therewith, which shall remain unremedied for a period of 15 days after notice thereof shall have been given by the Bank to the Borrower; or, (d) (i) Failure to perform any term, condition or covenant of any bond, note, debenture, loan agreement, indenture, guaranty, trust agreement, mortgage or other instrument or agreement in connection with the borrowing of money or the obtaining of advances or credit to which the Borrower or any Subsidiary is a party or by which it is bound, or by which any of its properties or assets may be affected (a "Debt Instrument"), so that, as a result of any such failure to perform (regardless of the satisfaction of any requirement for the giving of appropriate notice thereof or the lapse of time), the indebtedness included therein or secured or covered thereby may be declared due and payable prior to the date on which such indebtedness would otherwise become due and payable; or, (ii) any event or condition referred to in any Debt Instrument shall occur or fail to occur, so that, as a result thereof (regardless of the satisfaction of any requirement for the giving of appropriate notice thereof or the lapse of time), the indebtedness included therein or secured or covered thereby may be declared due and payable prior to the date on which such indebtedness would otherwise become due and payable; or, (iii) any indebtedness included in any Debt Instrument or secured or covered thereby is not paid when due; or (e) Any representation or warranty made in writing to the Bank in this Note or in connection with the making of the Loans evidenced hereby or any certificate, statement or report made in compliance with this Note, shall have been false in any material respect when made; or (f) An order for relief under the United States Bankruptcy code as now or hereafter in effect, shall be entered against the Borrower or any Subsidiary; or the Borrower or any Subsidiary shall become insolvent, generally fail to pay its debts as they become due, make an assignment for the benefit of creditors, file a petition or apply to any tribunal for the appointment of a receiver or any trustee for its or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or if there shall have been filed any such petition or application, or any such proceeding shall have been commenced against it, which remains undismissed for a period of thirty days or more; or the Borrower or any Subsidiary or endorser or guarantor hereof by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or the appointment of a receiver of or any trustee for it or any substantial part of any of its properties, or shall suffer any such receivership or trusteeship to continue undischarged for a period of thirty days or more; or, (g) Any judgment against the Borrower or any Subsidiary or any attachment, levy or execution against any of its properties for any amount shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of sixty days or more; or, (h) The Bank shall have determined, in its sole discretion, that one or more conditions exist or events have occurred which may result in a material adverse change in the business, properties or financial condition of the Borrower. 10. Interest Adjustment. Notwithstanding anything to the contrary contained in this Note, the rate of interest payable on this Note shall never exceed the maximum rate of interest permitted under applicable law. If at any time the rate of interest otherwise prescribed herein shall exceed such maximum rate, and such prescribed rate is thereafter below such maximum rate, the prescribed rate shall be increased to the maximum rate for such period of time as is required so that the total amount of interest received by the Bank is that which would have been received by the Bank, except for the operation of the first sentence of this Section 10. 11. Miscellaneous. (a) All agreements, representations and warranties made herein shall survive the delivery of this Note. The Borrower waives trial by jury, set-off and counterclaim of any nature or description other than mandatory counterclaims in any litigation in any court with respect to, in connection with, or arising out of, this Note or any instrument or document delivered pursuant hereto or the validity, protection, interpretation, collection or enforcement hereof. (b) No modification or waiver of or with respect to any provision of this Note, or consent to any departure by the Borrower from any of the terms or conditions hereof, shall in any event be effective unless it shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the borrower in any case shall, of itself, entitle it to any other or future notice or demand in similar or other circumstances. (c) Each and every right granted to the Bank hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Bank or the holder of this Note to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other future exercise thereof or the exercise of any other right. (d) In the event that this Note is placed in the hands of an attorney for collection by reason of any default hereunder, the Borrower agrees to pay reasonable attorney's fees so incurred. The Borrower promises to pay all expenses of any nature as soon as incurred whether in or out of court and whether incurred before or after this Note shall become due at its maturity date or otherwise and costs which the Bank may deem necessary or proper in connection with the satisfaction of the indebtedness or the administration, supervision, preservation, protection (including but not limited to maintenance of adequate insurance) of or the realization upon the collateral. (e) The Borrower hereby waives presentment, demand for payment, protest, notice of protest, notice of dishonor, and any or all other notices or demands except as otherwise expressly provided for herein. (f) All accounting terms not otherwise defined in this Note shall have the meanings ascribed thereto under generally accepted accounting principles. 12. Notices. All notices, requests and other communications pursuant to this Note shall be in writing, either by letter (delivered by hand or sent by certified mail, return receipt requested) or overnight mail, addressed as follows: (a) If to the Borrower: Medical Action Industries Inc. 150 Motor Parkway Hauppauge, New York 11788 Attn: Richard G. Satin Vice President and General Counsel and, (b) If to the Bank: European American Bank 730 Veterans Memorial Highway Hauppauge, New York 11788 Attn: Richard Romano Vice President Any notice, request or communication hereunder shall be deemed to have been given when deposited in the mails, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, addressed as aforesaid. Any party may change the person or address to whom or which the notices are to be given hereunder, but any such notice shall be effective only when actually received by the party to whom it is addressed. 13. Governing Law. This Note and the rights and obligations of the parties shall be construed and interpreted in accordance with the laws of the State of New York and the Borrower consents to the jurisdiction of the courts of New York in any action brought to enforce any rights of the Bank under this Note. MEDICAL ACTION INDUSTRIES INC. By: s/ Paul D. Meringola ----------------------------- Paul D. Meringola, President EX-23 3 CONSENT OF ERNST & YOUNG LLP. EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Medical Action Industries Inc. of our report dated May 24, 1996, included in the 1996 Annual Report to Stockholders of Medical Action Industries Inc. Our audits also include the financial statement schedule of Medical Action Industries Inc. listed in item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-11046) pertaining to the Incentive Stock Option Plan and Restricted Management Stock Bonus Plan and Registration Statements (Form S-8 No. 33-41765 and Form S-8 No. 33-66038) pertaining to the Non-Qualified Stock Option Plan of Medical Action Industries Inc. of our report dated May 24, 1996, with respect to the consolidated financial statements incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Medical Action Industries Inc. Melville, New York June 24, 1996 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 504 0 6,122 111 10,579 17,702 7,605 3,971 24,390 7,367 0 0 0 8 12,265 24,390 38,846 38,846 30,689 36,777 0 0 865 1,204 493 711 0 0 0 711 0.09 0.09
EX-99 5 ADDITIONAL EXHIBIT - UNDERTAKINGS EXHIBIT 99 The following undertakings are incorporated into the Company's Registration Statements on Form S-8 (Registration Nos. 33-11046, 33-41765 and 33-66038). (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. (e) 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. (i) 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. -----END PRIVACY-ENHANCED MESSAGE-----