0001171843-12-003950.txt : 20121105 0001171843-12-003950.hdr.sgml : 20121105 20121105165920 ACCESSION NUMBER: 0001171843-12-003950 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20120930 FILED AS OF DATE: 20121105 DATE AS OF CHANGE: 20121105 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13251 FILM NUMBER: 121180727 BUSINESS ADDRESS: STREET 1: 500 EXPRESSWAY DRIVE SOUTH CITY: BRENTWOOD STATE: NY ZIP: 11717 BUSINESS PHONE: 6312314600 MAIL ADDRESS: STREET 1: 500 EXPRESSWAY DRIVE SOUTH CITY: BRENTWOOD STATE: NY ZIP: 11717 10-Q 1 f10q_110212.htm FORM 10-Q f10q_110212.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
 
COMMISSION FILE NUMBER 0-13251
 
MEDICAL ACTION INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
 
 
DELAWARE
11-2421849
 
 
(State or other jurisdiction of
(I.R.S. Employer
 
 
incorporation or organization)
Identification No.)
 
 
500 Expressway Drive South, Brentwood, NY 11717
(Address of principal executive offices)
 
Registrant's telephone number, including area code:
 
(631) 231-4600
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x]
No [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
  Large accelerated filer [  ]   Accelerated filer [x]
  Non-accelerated filer [  ]   Smaller reporting company [  ]
  (Do not check if a smaller reporting company)  
 
           Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act).
Yes [  ]
No [x]
 
           16,390,628 shares of common stock are issued and outstanding as of November 5, 2012.
 
 

 
FORM 10-Q
CONTENTS


   
Page No.
         
   
     
     
     
     
     
   
   
   
         
     
         
   
   
   
   
   
   
   
     


 
2

 
FINANCIAL INFORMATION
Condensed Consolidated Financial Statements
 
MEDICAL ACTION INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
 
   
September 30,
2012
(Unaudited)
   
March 31,
2012
 
ASSETS
           
Current assets:
 
       
Cash and cash equivalents
  $ 544     $ 5,384  
Accounts receivable, less allowance for doubtful accounts of $787 at September 30, 2012 and $781 at March 31, 2012
    36,050       30,845  
Inventories, net
    51,599       53,825  
Prepaid expenses
    2,617       1,831  
Deferred income taxes
    3,316       3,139  
Prepaid income taxes
    1,297       1,279  
Other current assets
    1,648       1,880  
Total current assets
    97,071       98,183  
                 
Property, plant and equipment, net
    47,419       49,085  
Goodwill
    107,801       107,801  
Other intangible assets, net
    37,904       39,223  
Other assets, net
    2,669       2,852  
Total assets
  $ 292,864     $ 297,144  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 16,281     $ 11,295  
Accrued expenses
    24,729       18,135  
Current portion of capital lease obligation
    153       132  
Current portion of long-term debt
    6,000       8,000  
Total current liabilities
    47,163       37,562  
                 
Deferred income taxes
    29,450       29,450  
Capital lease obligation, less current portion
    13,567       13,655  
Long-term debt, less current portion
    53,425       67,670  
Total liabilities
    143,605       148,337  
                 
Stockholders’ equity:
               
Common stock, 40,000,000 shares authorized, $.001 par value; issued and outstanding 16,390,628 shares at September 30, 2012 and March 31, 2012
    16       16  
Additional paid-in capital
    35,002       34,478  
Accumulated other comprehensive loss
    (717 )     (717 )
Retained earnings
    114,958       115,030  
Total stockholders’ equity
    149,259       148,807  
Total liabilities and stockholders’ equity
  $ 292,864     $ 297,144  
 
The accompanying notes are an integral part of these condensed financial statements.
 
3

 
MEDICAL ACTION INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net sales
  $ 112,100     $ 109,655     $ 224,337     $ 216,128  
Cost of sales
    94,630       92,969       189,922       182,470  
Gross profit
    17,470       16,686       34,415       33,658  
                                 
Selling, general and administrative expenses
    16,166       15,355       32,110       30,783  
Operating income
    1,304       1,331       2,305       2,875  
                                 
Interest expense, net
    1,198       1,130       2,422       2,247  
                                 
Income (loss) before extraordinary item
    106       201       (117 )     628  
Income tax expense (benefit)
    41       87       (45 )     251  
Extraordinary gain, net of tax expense (note 12)
    -       440       -       440  
                                 
Net income (loss)
  $ 65     $ 554     $ (72 )   $ 817  
                                 
Per share basis :
                               
Basic
                               
Income (loss) before extraordinary item
  $ 0.00     $ 0.01     $ (0.00 )   $ 0.02  
Extraordinary gain, net of tax expense
    -       0.03       -       0.03  
Net income (loss)
  $ 0.00     $ 0.04     $ (0.00 )   $ 0.05  
                                 
Diluted
                               
Income (loss) before extraordinary item
  $ 0.00     $ 0.01     $ (0.00 )   $ 0.02  
Extraordinary gain, net of tax expense
    -       0.03       -       0.03  
Net income (loss)
  $ 0.00     $ 0.04     $ (0.00 )   $ 0.05  
 
The accompanying notes are an integral part of these condensed financial statements.

 
4

 
MEDICAL ACTION INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED SEPTEMBER 30, 2012
(Unaudited)
(dollars in thousands, except share data)

    Common Stock    
Additional
Paid-In
   
Accumulated
Other
Comprehensive
    Retained    
Total
Stockholders’
 
    Shares     Amount    
Capital
    Loss     Earnings     Equity  
                                     
Balance at April 1, 2012
    16,390,628     $ 16     $ 34,478     $ (717 )   $ 115,030     $ 148,807  
                                                 
Net loss
    -       -       -       -       (72 )     (72 )
                                                 
Amortization of deferred compensation
    -       -       5       -       -       5  
                                                 
Stock-based compensation
    -       -       519       -       -       519  
                                                 
Balance at September 30, 2012
    16,390,628     $ 16     $ 35,002     $ (717 )   $ 114,958     $ 149,259  
 
The accompanying notes are an integral part of this condensed financial statement.

 
5

 
MEDICAL ACTION INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 
   
Six Months Ended September 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ (72 )   $ 817  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Extraordinary gain
    -       (700 )
Depreciation
    2,591       2,963  
Amortization
    1,910       2,190  
Provision for allowance for doubtful accounts
    6       6  
Deferred income taxes
    (177 )     (121 )
Stock-based compensation
    524       330  
Excess tax liability from stock-based compensation
    -       (70 )
Tax benefit from vesting of stock under restricted management stock bonus plan and exercise of stock options
    -       19  
Changes in operating assets and liabilities:
               
Accounts receivable
    (5,211 )     (3,425 )
Inventories
    2,226       (911 )
Prepaid expenses and other current assets
    (554 )     (602 )
Prepaid income taxes
    (18 )     860  
Other assets
    (408 )     (645 )
Accounts payable
    4,986       (1,540 )
Accrued expenses
    6,594       (1,027 )
Net cash provided by (used in) operating activities
    12,397       (1,856 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase price adjustments
    -       125  
Purchases of property, plant and equipment
    (925 )     (469 )
Proceeds from sale of property and equipment
    -       3  
Net cash used in investing activities
    (925 )     (341 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from revolving line of credit and long-term borrowings
    33,550       46,052  
Principal payments on revolving line of credit and long-term borrowings
    (49,795 )     (44,718 )
Principal payments on capital lease obligation
    (67 )     (47 )
Proceeds from exercise of stock options
    -       20  
Net cash provided by (used in) financing activities
    (16,312 )     1,307  
                 
Net decrease in cash and cash equivalents
    (4,840 )     (890 )
Cash and cash equivalents at beginning of period
    5,384       1,691  
Cash and cash equivalents at end of period
  $ 544     $ 801  
                 
Supplemental disclosures:
               
Interest paid
  $ 2,312     $ 1,754  
Income taxes paid (refunded)
  $ 150     $ (174 )

The accompanying notes are an integral part of these condensed financial statements.
 
6

 
MEDICAL ACTION INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Medical Action Industries Inc. (“Medical Action” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q for quarterly reports under section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013. For further information, refer to the financial statements and footnotes thereto included in the Company’s 2012 Annual Report on Form 10-K.
 
A summary of the Company’s significant accounting policies is identified in Note 1 “Organization and Summary of Significant Accounting Policies” of the Company’s 2012 Annual Report on Form 10-K. Users of financial information produced for interim periods are encouraged to refer to the notes contained in the 2012 Annual Report on Form 10-K when reviewing interim financial results. There have been no changes to the Company’s significant accounting policies or to the assumptions and estimates involved in applying these policies. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. All dollar amounts presented in our notes to condensed consolidated financial statements are presented in thousands, except share and per share data.

Note 2. Summary of Significant Accounting Policies

The preparation of consolidated annual and quarterly financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We have made a number of estimates and assumptions in the preparation of these consolidated financial statements. We can give no assurance that actual results will not differ from those estimates. Some of the more significant estimates include allowances for trade rebates and doubtful accounts, realizability of inventories, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability, pensions and other postretirement benefits and environmental and litigation matters.

The Company determined the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair values because of their short-term nature.  The Company determined that the carrying amounts of borrowings outstanding under its revolving credit facility and term loan approximate fair value since such borrowings bear interest at variable market rates.

 
7

 
Note 3. Recently Issued Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance included in Accounting Standards Codification (“ASC”) 220, Comprehensive Income, related to the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The adoption of this disclosure-only guidance will not have an impact on the Company’s consolidated financial results and was effective for the Company on April 1, 2012. Comprehensive income (loss) is the same as net income (loss) for the three and six months ended September 30, 2012 and 2011.

Goodwill Impairment Testing

In September 2011, the FASB issued authoritative guidance in ASC 350, Intangibles – Goodwill and Other, intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011.  The Company early adopted the guidance in the third quarter of fiscal 2012. The adoption of this authoritative guidance did not have any effect on the Company’s consolidated financial statements.

Balance Sheet Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not anticipate that the adoption of ASU 2011-11 will have a material effect on our consolidated financial statements and disclosures.

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB issued authoritative guidance in ASC 350, Intangibles – Goodwill and Other, intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary.  This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 30, 2012, for the Company beginning in the first quarter of fiscal 2014, and early adoption is permitted.  The Company does not anticipate the adoption will have an impact on its consolidated financial position or results of operations.

 
8

 
Note 4. Inventories

Inventories, which are stated at the lower of cost (determined by means of the first in, first out method) or market, consist of the following:

   
September 30,
2012
   
March 31,
2012
 
Finished goods, net
  $ 25,885     $ 29,051  
Raw materials
    18,940       20,434  
Work in progress
    6,774       4,340  
                 
Total inventories, net
  $ 51,599     $ 53,825  
 
On a continuing basis, inventory quantities on hand are reviewed and an analysis of the provision for excess and obsolete inventory is performed based primarily on the Company’s sales history and anticipated future demand. The reserve for excess and obsolete inventory amounted to approximately $1,094 at September 30, 2012 and $1,015 at March 31, 2012.

Note 5. Related Party Transactions

As part of the assets and liabilities acquired as a result of the AVID acquisition, the Company assumed a capital lease obligation for the AVID facility located in Toano, Virginia. The facility, which includes a 185,000 square foot manufacturing and warehouse building and approximately 12 acres of land, is owned by Micpar Realty, LLC (“Micpar”). AVID’s founder, former CEO and principal shareholder, is a part owner of Micpar and subsequent to the acquisition of AVID, he was appointed to the Company’s board of directors. As of August 2012, he no longer serves on the Company’s board of directors.

The gross amount and related accumulated amortization of the AVID facility is as follows:
 
   
September 30,
2012
   
March 31,
2012
 
Plant and fixed equipment
  $ 11,409     $ 11,409  
Less: Accumulated amortization
    (1,279 )     (972 )
    $ 10,130     $ 10,437  
 
During the three and six months ended September 30, 2012 and 2011, the Company recorded $153 (of which $35 is included in our cost of sales and $118 is included in our selling, general and administrative expenses) and $307 (of which $71 is included in our cost of sales and $236 is included in our selling, general and administrative expenses) of amortization expense associated with the capital lease, respectively.

As of September 30, 2012, the capital lease requires monthly payments of $124 with increases of 2% per annum. The lease contains provisions for an option to buy after three and five years and expires in March 2029. The effective rate on the capital lease obligation is 9.9%.  The Company recorded interest expense associated with the lease obligation of $339 and $341 for the three months ended September 30, 2012 and 2011, respectively, and $678 and $684 for the six months ended September 30, 2012 and 2011, respectively.

 
9

 
The following is a schedule by years of the future minimum lease payments under the capital lease as of September 30, 2012:
 
Fiscal Year
 
Capital Lease Payments
Balance of Fiscal 2013
  $
744
 
2014
   
1,534
 
2015
   
1,564
 
2016
   
1,595
 
2017
   
1,627
 
Thereafter
   
22,042
 
Total minimum lease payments
   
29,044
 
Less:  Amounts representing interest
   
15,324
 
Present value of minimum lease payments
   
13,720
 
Less: Current portion of capital lease obligation
   
153
 
Long-term portion of capital lease obligation
  $
13,567
 

A current member of the Company’s board of directors is currently a minority shareholder of Custom Healthcare Systems (CHS), an assembler and packager of Class 1 medical products. CHS is a supplier to our AVID facility located in Toano, Virginia for small kits and trays. They also purchase sterile instruments from our facility located in Arden, North Carolina. CHS sold approximately $453 and $889 in small kits and trays to the Company during the three and six months ended September 30, 2012, respectively and purchased approximately $200 and $463 of sterile instruments from the Company during the three and six months ended September 30, 2012.  As of September 30, 2012, $239 was due to the Company from CHS and $28 was due to CHS from the Company.







 
 
10

 
Note 6. Other Intangible Assets
 
At September 30, 2012, other intangible assets consisted of the following:
   
Gross
Carrying
Value
   
Accumulated
Amortization
   
Total Net
Book Value
 
                   
Trademarks/tradenames not subject to amortization
  $ 1,266     $ -     $ 1,266  
Trademarks subject to amortization (5 years)
    2,100       875       1,225  
Customer relationships (20 years)
    43,200       7,848       35,352  
Intellectual property (7 years)
    400       339       61  
Total other intangible assets, net
  $ 46,966     $ 9,062     $ 37,904  
 
At March 31, 2012, other intangible assets consisted of the following:
   
Gross
Carrying
Value
   
Accumulated
Amortization
   
Total Net
Book Value
 
                   
Trademarks/tradenames not subject to amortization
  $ 1,266     $ -     $ 1,266  
Trademarks subject to amortization (5 years)
    2,100       665       1,435  
Customer relationships (20 years)
    43,200       6,767       36,433  
Intellectual property (7 years)
    400       311       89  
Total other intangible assets, net
  $ 46,966     $ 7,743     $ 39,223  
 
The Company recorded amortization expense related to the above amortizable intangible assets of $659 and $660 for the three months ended September 30, 2012 and 2011, respectively and $1,319 for both six month periods ended September 30, 2012 and 2011. The estimated aggregate amortization expense for the cumulative five years ending September 30, 2017 amounts to $12,086.

Note 7. Credit Facilities and Long-Term Debt

Long-term debt consists of the following:
   
September 30,
2012
   
March 31,
2012
 
Revolving credit loan (a)
  $ 9,425     $ 19,670  
Term loan (a)
    50,000       56,000  
                 
    $ 59,425     $ 75,670  
                 
Less: current portion
    6,000       8,000  
                 
Total long-term debt
  $ 53,425     $ 67,670  
 
On June 7, 2012, the Company entered into the Second Amended and Restated Credit Agreement (the “New Credit Agreement”) with certain lenders and a bank acting as administrative agent for the lenders. The New Credit Agreement modified certain terms and conditions of the First Amended and Restated Credit Agreement (the “Prior Credit Agreement”) dated August 27, 2010 with such lenders. The Prior Credit Agreement provided the Company with total borrowings of up to $110,000, consisting of (i) a secured term loan with a principal amount of $80,000 and (ii) a revolving credit facility up to $30,000. The Prior Credit Agreement was used to repay a previous term loan and to fund the acquisition of AVID. The New Credit Agreement provides the Company with total borrowings of up to $76,000, consisting of (i) a secured term loan with a principal amount of $51,000 and (ii) a secured revolving credit facility, which amounts may be borrowed, repaid and re-borrowed up to $25,000.
 
11

 
The New Credit Agreement, which expires June 30, 2014, shall be used to finance the working capital needs and general corporate purposes of the Company and for permitted acquisitions. Under the New Credit Agreement, the remaining term loan maturation is as follows; (i) $1,000 on December 31, 2012 and March 31, 2013, (ii) $2,000 on June 30, 2013 and September 30, 2013, (iii) $2,250 on December 31, 2013 and March 31, 2014 and (iv) $39,500 on June 30, 2014. Both the term loan and the revolving credit facility bear interest at LIBOR plus up to 3.5% and LIBOR plus 4% under the terms of the Prior and New Credit Agreements, respectively. The average interest rate on the term loan under the New Credit Agreement and Prior Credit Agreement approximated 4.07% and 3.39%, during the six months ended September 30, 2012 and 2011, respectively, and the average interest rate on the revolving credit facility under the New Credit Agreement and Prior Credit Agreement approximated 4.68% and 5.39%, during the six months ended September 30, 2012 and 2011, respectively.
 
Borrowings under the New Credit Agreement are collateralized by substantially all the assets of the Company and its subsidiaries, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of indebtedness, granting of liens, guarantees of obligations, mergers, acquisitions, capital expenditures, making loans or investments, specified sales of assets and prohibits the declaration and payment of dividends. The Company is also required to comply with specified financial covenants relating to (i) maximum annual capital expenditures of $4,000, (ii) a minimum fixed charge coverage ratio of 1.00 to 1.00 on a rolling four fiscal quarter basis and (iii) minimum earnings before interest, taxes, depreciation and amortization for certain specified quarterly periods through the expiration of the loans, including $3,000 for the fiscal quarter ending on June 30, 2012, $7,500 for the two consecutive fiscal quarter period ending September 30, 2012, $13,750 for the three consecutive fiscal quarter period ending December 31, 2012, $18,000 for the four consecutive fiscal quarter period ending March 31, 2013 and $21,000 for the four consecutive fiscal quarter period ending June 30, 2013. In addition, the Company has committed to certain post-closing conditions, including providing monthly financial statements, quarterly updates of financial projections and filed mortgages on our North Carolina, West Virginia and Tennessee facilities. As of November 5, 2012, the Company is in compliance with all covenants and financial ratios under the New Credit Agreement.

In addition, a borrowing base has been added to the New Credit Agreement such that the total outstanding loans plus available commitments thereunder may not exceed the specified percentages of the value of eligible receivables, inventory, equipment, real property plus a permitted over-advance amount, all calculated monthly. In the event outstanding amounts of loans under the New Credit Agreement exceed this borrowing base, the Company would be required to prepay the excess.  The Company’s availability on the revolving credit facility, as determined by the provisions of the borrowing base, amounted to $12,291 at September 30, 2012, which is in addition to the $9,425 currently outstanding.

 
12

 
Note 8. Stock-Based Compensation Plans
 
The Company has various stock-based compensation plans and recognized stock-based compensation (exclusive of deferred tax benefits) for awards granted under the Company’s stock-based compensation plans in the following line items in the Condensed Consolidated Statements of Operations:

   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Cost of sales
  $ 17     $ 9     $ 27     $ 26  
Selling, general and administrative expenses
    330       131       497       304  
                                 
Stock-based compensation expense before income tax benefits
  $ 347     $ 140     $ 524     $ 330  
 
The Company granted 257,500 stock options to employees during the three and six months ended September 30, 2012, which vest 25% during fiscal 2014, 25% during fiscal 2015 and 50% during fiscal 2016.  The options expire 10 years from date of grant and have a weighted average exercise price equal to $3.61, have a weighted average remaining contractual term of 9.7 years and weighted average grant date fair value of $2.01 per share determined based upon a Black-Scholes option valuation model.  In addition to the above employee stock option grants, the Company granted 60,000 stock options to members of the Company’s board of directors during the three and six months ended September 30, 2012, which became fully vested upon issuance.  These options have a weighted average exercise price equal to $3.57, have a weighted average remaining contractual term of 9.9 years and a weighted average grant date fair value of $1.98 per share based upon a Black-Scholes option valuation model.

The fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options granted during the respective periods using the Black-Scholes option valuation model were as follows:
 
   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Dividend yield
    n/a       n/a       n/a       n/a  
Weighted-average expected volatility
    63.44 %     n/a       63.44 %     n/a  
Risk-free interest rate
    1.65 %     n/a       1.65 %     n/a  
Expected life of options (in years)
    5.33       n/a       5.33       n/a  
Fair value of options granted
  $ 2.00       n/a     $ 2.00       n/a  
 
No stock options were granted during the three or six months ended September 30, 2011.
 
13

 
The following is a summary of the changes in outstanding options for all of the Company’s plans during the six months ended September 30, 2012:

   
Shares
   
Weighted
Average
Exercise
Price
   
Remaining
Weighted
Average
Contract Life
(Years)
   
Aggregate
Intrinsic
Value
 
Outstanding at April 1, 2012
    1,348,437     $ 12.44       5.2     $ 14  
Granted
    317,500     $ 3.60                  
Exercised
    -     $ -                  
Expired/Forfeited
    (160,187 )   $ 9.80                  
Outstanding at September 30, 2012
    1,505,750     $ 10.86       6.1     $ -  
                                 
Options exercisable at September 30, 2012
    949,092     $ 12.88       4.6     $ -  
 
The total intrinsic value of options exercised during the six months ended September 30, 2012 and 2011 was $0 and $47, respectively. As of September 30, 2012, there was approximately $2,273 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Company’s plans and that cost is expected to be recognized over a period of 2.8 years.

The following is a summary of the changes in non-vested stock options for the six months ended September 30, 2012:
 
   
Shares
   
Weighted
Average
Grant Date
Fair Value
 
Outstanding at April 1, 2012
    413,533     $ 5.89  
Granted
    317,500     $ 3.60  
Vested
    (145,125 )   $ 4.32  
Forfeited
    (29,250 )   $ 5.92  
                 
Outstanding at September 30, 2012
    556,658     $ 4.08  

Grants of restricted stock are common stock awards granted to recipients with specified vesting provisions. The restricted stock issued vests based upon the recipients continued service over time (five-year vesting period). The Company estimates the fair value of restricted stock based on the Company’s closing stock price on the date of grant.  The total intrinsic value of restricted stock vested during the six months ended September 30, 2012 and 2011 was $0.
 
14

 
The following is a summary of restricted stock activity in our 1994 Stock Incentive Plan for the six months ended September 30, 2012:
 
   
Shares
   
Weighted
Average
Grant Price
 
Non-Vested at April 1, 2012
    7,500     $ 12.58  
Granted
    -     $ -  
Vested
    (1,875 )   $ 12.58  
Forfeited
    -     $ -  
                 
Non-Vested at September 30, 2012
    5,625     $ 12.58  

Note 9. Income Taxes

The Company’s provision for income taxes as a percentage of pretax income and losses (“effective tax rate”) was 38.5% for the six months ended September 30, 2012 and 2011. The effective tax rate consists of the federal tax rate of 35% and the effective state tax rate, net of any federal taxes.
 
In accordance with the provisions of ASC 740, Income Taxes, we recognize in our financial statements only those tax positions that meet the more-likely-than-not-recognition threshold. We establish tax reserves for uncertain tax positions that do not meet this threshold. Interest and penalties associated with income tax matters are included in the provision for income taxes in our consolidated statements of operations. Our accrual for interest and penalties was $21 at September 30, 2012.

Note 10. Earnings Per Share

Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of potential common shares. Diluted earnings per share are based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average prices during the periods. Excluded from the calculation of earnings per share are options to purchase 1,430,016 and 1,372,838 shares for the three and six months ended September 30, 2012, respectively and 1,321,437 and 1,320,312  shares for the three and six months ended September 30, 2011, respectively as their inclusion would not have been dilutive.

The following is a reconciliation of the numerator and denominator of the basic and diluted net earnings per share computations for the three and six months ended September 30, 2012 and 2011, respectively.
 
 
15

 
 
   
Three Months Ended
September 30,
   
Six Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Numerator :
                       
Income (loss) before extraordinary item
  $ 65     $ 114     $ (72 )   $ 377  
Extraordinary gain (note 12)
    -       440       -       440  
Net income (loss) for basic and diluted earnings per share
  $ 65     $ 554     $ (72 )   $ 817  
                                 
Denominator :
                               
Denominator for basic earnings per share - weighted average shares
    16,390,628       16,390,628       16,390,628       16,390,545  
                                 
Effect of dilutive securities:
                               
Employee and director stock options
    7,488       -       -       54  
Denominator for diluted earnings per share - adjusted weighted average shares
    16,398,116       16,390,628       16,390,628       16,390,599  
                                 
Per share basis:
                               
Basic
                               
Income before extraordinary gain
  $ 0.00     $ 0.01     $ (0.00 )   $ 0.02  
Extraordinary gain, net of tax expense
    -       0.03       -       0.03  
Net income (loss)
  $ 0.00     $ 0.04     $ (0.00 )   $ 0.05  
                                 
Diluted
                               
Income before extraordinary gain
  $ 0.00     $ 0.01     $ (0.00 )   $ 0.02  
Extraordinary gain, net of tax expense
    -       0.03       -       0.03  
Net income (loss)
  $ 0.00     $ 0.04     $ (0.00 )   $ 0.05  

Note 11. Other Matters

The Company is involved in two product liability cases, which are covered by insurance. While the results of these 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.

Note 12. Extraordinary Gain

During the six months ended September 30, 2011, the Company recorded an extraordinary gain of $440 (net of tax expense of $260) as a result of an insurance settlement relating to inventories damaged as a result of weather-related water damage. The inventories damaged were predominantly patient bedside disposables and did not negatively impact the Company's service levels with respect to this product class.
 
 
16

 
 
Management's Discussion and Analysis of Financial Condition and  Results of Operations

Forward-Looking Statement

This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the future economic performance and financial results of the Company. The forward-looking statements relate to (i) the expansion of the Company’s market share, (ii) the Company’s growth into new markets, (iii) the development of new products and product lines to appeal to the needs of the Company’s customers, (iv) the retention of the Company’s earnings for use in the operation and expansion of the Company’s business and (v) the ability of the Company to avoid information technology system failures which could disrupt the Company’s ability to function in the normal course of business by potentially causing delays or cancellation of customer orders, impeding the manufacture or shipment of products, or resulting in the unintentional disclosure of customer or Company information.

Important factors and risks that could cause actual results to differ materially from those referred to in the forward-looking statements include, but are not limited to, the effect of economic and market conditions, the impact of the consolidation throughout the healthcare supply chain, volatility of raw material costs, volatility in oil prices, foreign currency exchange rates, the impact of healthcare reform, opportunities for acquisitions and the Company’s ability to effectively integrate acquired companies, the ability of the Company to maintain its gross profit margins, the ability to obtain additional financing to expand the Company’s business, the failure of the Company to successfully compete with competitors that have greater financial resources, the loss of key management personnel or the inability of the Company to attract and retain qualified personnel, the impact of current or pending legislation and regulation, as well as the risks described from time to time in the Company’s filings with the Securities and Exchange Commission, which include this report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

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.

 
17

 
Overview

We manufacture and market single-use medical products used principally by acute care facilities within the United States. Our product lines are divided into two markets, Clinical Care and Patient Care. Our Clinical Care market includes custom procedure trays, minor procedure kits and trays, operating room disposables and sterilization products. Our Patient Care market includes patient bedside products, containment systems for medical waste and laboratory products.

Our market approach encompasses ongoing strategic relationships with group purchasing organizations (“GPOs”), integrated delivery networks (“IDNs”), acute care facilities, surgery centers, clinical decision makers and procurement managers within acute care facilities, national and regional distributors and other end users of our products. Over the previous two years we have implemented an internal structure to support a market presence which encompasses; i) a marketing team comprised of product line managers for each of our key product categories, ii) an Executive Health Services team, that directly maintains our relationship with GPOs and IDNs, iii) regional managers who supervise both Clinical Care and Patient Care sales representatives and maintain relationships with larger acute care facilities and iv) sales representatives which maintain a direct presence with the end users of our products and manage compliance levels on GPO and IDN contracts. While we view the end users of our products as the critical decision point driving our market penetration approximately 67% of our products are sold through two national distributors.

We have supply agreements with substantially every major GPO and IDN in the country including Novation, Premier and MedAssets. A majority of the acute care facilities that we sell to are members of at least one GPO. The supply agreements we have been awarded through these GPOs designate the Company as a sole-source or multi-source provider for substantially all of our product offerings.  We consider our relationships with the GPOs and IDNs that we conduct business with to be valuable intangible assets. The supply agreements with GPOs and IDNs typically have no minimum purchase requirements and terms of one to three years that can be terminated on ninety days advance notice. While the acute care facilities associated with the GPOs and IDNs are not obligated to purchase our product offerings, many of these supply agreements have resulted in unit sales growth for the Company. Acute care facility orders purchased through our supply agreements by the three largest GPOs in the healthcare industry, Novation, Premier and MedAssets, accounted for $101,692 or 45% of our total net sales for the six months ended September 30, 2012.

Over time we have increased revenues both organically and via acquisition. At this time we have focused our resources on increasing sales within existing product lines and continuing synergy initiatives associated with the AVID acquisition to drive organic sales growth.

We source our products from our four production facilities in the United States and from foreign suppliers, principally based in China. Our domestic production facilities and foreign suppliers have sufficient capacity to meet current product demand.

We conduct injection molding production and blown film production in our Gallaway, Tennessee and Clarksburg, West Virginia facilities, respectively. We conduct minor procedure kit and tray assembly operations and custom procedure tray assembly operations in our Arden, North Carolina and Toano, Virginia facilities, respectively. The principal raw materials used in the production of our product lines include resin and cotton. Our production facilities consume over 50 million pounds of resin, namely polypropylene and polyethylene, per annum. Cotton is purchased by our foreign suppliers and converted into finished products, principally operating room towels and laparotomy sponges. We purchase finished goods that contain over 10 million pounds of cotton per annum.

 
18

 
The challenging economic environment of the past three years has negatively impacted hospital utilization, placed adverse economic pressure on acute care facilities and fostered volatility in commodity prices. These factors have impacted our revenues, average selling prices and gross profit. We have addressed these conditions by expanding our product lines, investing in our sales and marketing teams, managing our operating costs and differentiating ourselves in the market by emphasizing our ability to add value to our customers by improving their patient outcomes. We remain committed to being a trusted strategic partner to our customers known for delivering innovative solutions to the healthcare community to improve the quality of care and enhancing patient experiences.

During the three months ended September 30, 2012 and 2011, we reported revenues of $112,100 and $109,655, respectively. Our net income and earnings per diluted share during the three months ended September 30, 2012 and 2011 amounted to $65 or $0.00 per diluted share, and $554 or $0.03 per diluted share, respectively.  Net income during the three months ended September 30, 2011 included a $440 gain, net of applicable taxes, on an insurance settlement relating to inventories damaged as a result of weather-related water damage.

During the six months ended September 30, 2012 and 2011, we reported revenues of $224,337 and $216,128, respectively. Our net income (loss) and earnings per diluted share during the six months ended September 30, 2012 and 2011 amounted to $(71) or $(0.00) per diluted share, and $817 or $0.05 per diluted share, respectively.  Net income during the six months ended September 30, 2011 benefitted from the aforementioned insurance settlement.

 
THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2011:

The following table sets forth net sales by market for the three months ended September 30, 2012 and 2011:
 
   
September
30, 2012
   
September
30, 2011
   
Increase
(decrease)
due to
price / mix
   
Increase
(decrease)
due to
volume /
mix
 
Clinical Care Market
  $ 72,273     $ 66,652     $ (25 )   $ 5,646  
Patient Care Market
    42,752       45,496       (229 )     (2,515 )
Sales Related Adjustments
    (2,925 )     (2,493 )     (366 )     (66 )
Total net sales
  $ 112,100     $ 109,655     $ (620 )   $ 3,065  

Net sales were $112,100 and $109,655 during the three months ended September 30, 2012 and 2011, respectively. The increase in net sales was comprised of an increase in unit sales in the amount of $3,065, partially offset by a change in mix of products purchased by our customers in the amount of $620. The increase in unit sales was predominantly attributable to higher domestic market penetration within our minor procedure kits and trays and custom procedure trays products.

 
19

 
Gross profit was $17,470 and $16,686 during the three months ended September 30, 2012 and 2011, respectively. Gross profits as a percentage of net sales were 15.6% during the three months ended September 30, 2012 and 15.2% during the three months ended September 30, 2011. The increase in gross profits was attributable to higher sales volume and a decline in costs of raw materials.

Resin-related product lines which include containment systems for medical waste, patient bedside disposable products and laboratory products, represent approximately 35% of the Company’s revenues for the three months ended September 30, 2012. The primary raw material utilized in the manufacture of these products is plastic resin. We continue to experience volatility in resin costs consistent with the changes in global market prices of oil.  Our gross profit during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was favorably impacted by $684 due to lower resin prices.

During the three months ended September 30, 2012, we imported approximately $15,622 of finished goods and certain raw materials from overseas vendors, principally China. Our main imports are operating room products, which include operating room towels and laparotomy sponges, minor procedure kits and trays and surgical instruments used in our minor procedure kits and trays and certain containment products and patient bedside disposable products that we do not produce domestically. The products we import from China include cotton and plastic resin as raw materials.

The costs within the global market for cotton, while still volatile, have declined from their peak in March 2011. While the Company does not directly purchase unfinished cotton and convert the material into finished goods, it is the primary raw material utilized in the production of our operating room towels and laparotomy sponges. Our gross profit during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was favorably impacted by $56 due to lower costs of products sourced from overseas vendors.

Selling, general and administrative expenses amounted to $16,166 and $15,355 during the three months ended September 30, 2012 and 2011, respectively. The increase is primarily due to $480 in higher GPO administration fees resulting from higher sales volume and a new GPO supply agreement, $300 in professional services associated with the renegotiation of our credit agreement and $184 in higher stock-based compensation expense. These increases were partially offset by declines of $183 in depreciation expense and $50 in various recall-related expenses (associated with a supplier) incurred during the three months ended September 30, 2011.

Distribution expenses, which are included in selling, general and administrative expenses, amounted to $2,078 and $1,933 during the three months ended September 30, 2012 and 2011, respectively. The increase is primarily due to increased sales volumes and labor-related costs, principally overtime expenses.
 
Interest expense amounted to $1,197 and $1,130 during the three months ended September 30, 2012 and 2011, respectively. The increase in interest expense was attributable to an increase in interest rates, partially offset by a decrease in outstanding principal loan balances.
 
Income tax expense amounted to $41 and $347 during the three months ended September 30, 2012 and 2011, respectively. Income tax expense as a percent of income before income taxes was 38.5% during the three months ended September 30, 2012 and 2011.

 
20

 
SIX MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 2011:

The following table sets forth net sales by market for the six months ended September 30, 2012 and 2011:
 
   
September
30, 2012
   
September
30, 2011
   
Increase
(decrease)
due to
price / mix
   
Increase
(decrease)
due to
volume /
mix
 
Clinical Care Market
  $ 142,236     $ 133,681     $ 732     $ 7,823  
Patient Care Market
    88,254       88,871       (812 )     195  
Sales Related Adjustments
    (6,153 )     (6,423 )     (534 )     804  
     Total net sales
  $ 224,337     $ 216,128     $ (614 )   $ 8,822  

Net sales were $224,337 and $216,128 during the six months ended September 30, 2012 and 2011, respectively. The increase in net sales was comprised of an increase in unit sales in the amount of $8,822, partially offset by a change in mix of products purchased by our customers in the amount of $614. The increase in unit sales was predominantly attributable to higher domestic market penetration within our custom procedure trays, minor procedure kits and trays and patient bedside disposable products.

Gross profit was $34,415 and $33,658 during the six months ended September 30, 2012 and 2011, respectively. Gross profits as a percentage of net sales were 15.3% during the six months ended September 30, 2012 and 15.6% during the six months ended September 30, 2011. The increase in gross profits was attributable to higher sales volume.  The decline in gross profits as a percentage of net sales was due to a change in mix of products purchased by our customers.

Resin-related product lines which include containment systems for medical waste, patient bedside disposable products and laboratory products, represent approximately 35% of the Company’s revenues for the six months ended September 30, 2012. The primary raw material utilized in the manufacture of these products is plastic resin. We continue to experience volatility in resin costs consistent with the changes in global market prices of oil.  Our gross profit during the six months ended September 30, 2012 as compared to the six months ended September 30, 2011 was unfavorably impacted by $215 due to higher resin prices.

During the six months ended September 30, 2012, we imported approximately $33,807 of finished goods and certain raw materials from overseas vendors, principally China. Our main imports are operating room products, which include operating room towels and laparotomy sponges, minor procedure kits and trays and surgical instruments used in our minor procedure kits and trays and certain containment products and patient bedside disposable products that we do not produce domestically. The products we import from China include cotton and plastic resin as raw materials.

The costs within the global market for cotton, while still volatile, have declined from their peak in March 2011. While the Company does not directly purchase unfinished cotton and convert the material into finished goods, it is the primary raw material utilized in the production of our operating room towels and laparotomy sponges. Our gross profit during the six months ended September 30, 2012 as compared to the six months ended September 30, 2011 was favorably impacted by $238 due to lower costs of products sourced from overseas vendors.

 
21

 
Selling, general and administrative expenses amounted to $32,109 and $30,783 during the six months ended September 30, 2012 and 2011, respectively. The increase is primarily due to $1,057 in higher GPO administration fees resulting from higher sales volume and a new GPO supply agreement, $682 in professional services associated with the renegotiation of our credit agreement and $184 in higher stock-based compensation expense. These increases were partially offset by declines of $440 in depreciation expense and $250 in various recall-related expenses (associated with a supplier) incurred during the six months ended September 30, 2011.

Distribution expenses, which are included in selling, general and administrative expenses, amounted to $4,219 and $3,809 during the six months ended September 30, 2012 and 2011, respectively. The increase is primarily due to increased sales volumes and labor-related costs, principally overtime expenses.

Interest expense amounted to $2,422 and $2,247 during the six months ended September 30, 2012 and 2011, respectively. The increase in interest expense was attributable to an increase in interest rates, partially offset by a decrease in outstanding principal loan balances.

Income tax expense (benefit) amounted to $(45) and $511 during the six months ended September 30, 2012 and 2011, respectively. Income tax expense (benefit) as a percent of income (loss) before income taxes was 38.5% during the six months ended September 30, 2012 and 2011.

Liquidity and Capital Resources

Cash Flows

Cash and cash equivalents changed as follows during the six months ended September 30:

   
2012
   
2011
 
Cash provided by (used in)  operating activities
  $ 12,397     $ (1,856 )
Cash used in investing activities
  $ (925 )   $ (341 )
Cash provided by (used in) financing activities
  $ (16,312 )   $ 1,307  
Decrease in cash and cash equivalents
  $ (4,840 )   $ (890 )
 
Historically, the Company’s primary sources of liquidity and capital resources have included cash provided by operations and the use of available borrowing facilities while the primary uses of liquidity and capital resources have included acquisitions, capital expenditures and payments on debt.

Cash provided by operating activities during the six months ended September 30, 2012 was primarily comprised of depreciation of $2,591, amortization of $1,910 and increases in (i) accrued expenses of $6,594, (ii) accounts payable of $4,986 and a decrease in inventories of $2,226. This was partially offset by increases in accounts receivable of $5,211.

Cash used in investing activities during the six months ended September 30, 2012 consisted of $925 in purchases of property, plant and equipment. The majority of these capital expenditures related to machinery and equipment for our injection molding facility located in Gallaway, Tennessee. The Company’s credit facilities contain certain covenants and restrictions, which include limitations on capital expenditures. During fiscal 2013, the Company is permitted under the terms of its Credit Agreement, to spend up to $4,000 on capital expenditures per annum.

 
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Cash used in financing activities during the six months ended September 30, 2012 consisted primarily of $16,245 in net payments on our Credit Agreement. During the six months ended September 30, 2012, the Company reduced its term loan by $6,000 and its revolving credit loan by $10,245.

 
Financial Position

The following table sets forth certain liquidity and capital resources data for the periods indicated:

   
September 30,
2012
   
March 31,
2012
 
   
(Unaudited)
       
             
Cash and cash equivalents
  $ 544     $ 5,384  
Accounts receivable, net
  $ 36,050     $ 30,845  
Days sales outstanding
    28.9       26.0  
Inventories, net
  $ 51,599     $ 53,825  
Inventory turnover
    6.4       6.3  
Current assets
  $ 97,071     $ 98,183  
Working capital
  $ 49,908     $ 60,621  
Current ratio
    2.1       2.6  
Total borrowings
  $ 73,145     $ 89,457  
Stockholder’s equity
  $ 149,259     $ 148,807  
Debt to equity ratio
    0.49       0.60  
 
The Company is committed to maintaining a strong financial position through maintaining sufficient levels of available liquidity, managing working capital and generating cash flows necessary to meet operating requirements. Total borrowings outstanding were $73,145 with a debt to equity ratio of 0.49 to 1.0 at September 30, 2012 as compared to $89,457 with a debt to equity ratio of 0.60 to 1.0 at March 31, 2012. Cash and cash equivalents at September 30, 2012 were $544 and the Company had $12,291 available for additional borrowings under its revolving credit facility.

Working capital at September 30, 2012 was $49,908 compared to $60,621 at March 31, 2012, and the current ratio at September 30, 2012 was 2.1 to 1.0 compared to 2.6 to 1.0 at March 31, 2012. The decrease in working capital is primarily the result of repayments of our long-term debt of $14,200 during the six months ended September 30, 2012.

On June 7, 2012, the Company entered into our Second Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement requires us to comply with specified financial covenants relating to (i) maximum annual capital expenditures of $4,000, (ii) a minimum fixed charge coverage ratio of 1.00 to 1.00 on a rolling four fiscal quarter basis and (iii) minimum earnings before interest, taxes, depreciation and amortization for certain specified quarterly periods through the expiration of the loans, including $3,000 for the fiscal quarter ending on June 30, 2012, $7,500 for the two consecutive fiscal quarter period ending September 30, 2012, $13,750 for the three consecutive fiscal quarter period ending December 31, 2012, $18,000 for the four consecutive fiscal quarter period ending March 31, 2013 and $21,000 for the four consecutive fiscal quarter period ending June 30, 2013. In addition, the Company has committed to certain post-closing conditions, including providing monthly financial statements, quarterly updates of financial projections and filed mortgages on our North Carolina, West Virginia and Tennessee facilities. As of November 5, 2012, the Company is in compliance with all covenants and financial ratios under the Second Amended and Restated Credit Agreement.
 
23

 
Borrowings under the Second Amended and Restated Credit Agreement are collateralized by substantially all of the assets of the Company and its subsidiaries, and the agreement contains certain restrictive covenants, which, among other matters, impose limitations with respect to the incurrence of indebtedness, granting of liens, guarantees of obligations, mergers, acquisitions, capital expenditures, making loans or investments, specified sales of assets and prohibits the declaration and payment of dividends.

The Company believes that the anticipated future cash flow from operations, coupled with its cash on hand and available funds under its revolving credit facility will be sufficient to meet working capital requirements. Although we have borrowing capacity on our revolving credit agreement, have cash on hand and anticipate future cash flow from operations, we may be limited in our ability to allocate funds for purposes such as potential acquisitions, capital expenditures, marketing, development and other general corporate purposes. In addition, we may be limited in our flexibility in planning for or responding to changing conditions in our business and our industry, making us more vulnerable to general economic down turns and adverse developments in our business.


Borrowing Arrangements

On August 27, 2010, Medical Action entered into our Prior Credit Agreement, among the Company, as borrower, JPMorgan Chase Bank, N.A., as administrative agent and the lenders party thereto pursuant to which such lenders agreed to make certain extensions of credit to the Company. On June 7, 2012, the Company agreed to amend and restate the Prior Credit Agreement in its entirety and entered into a New Credit Agreement, among the Company, as borrower, JPMorgan Chase, N.A., as administrative agent, Citibank, N.A., as syndication agent and HSBC Bank USA, N.A., Sovereign Bank and Wells Fargo Bank, N.A. as co-documentation agents and the other lenders party thereto (the “Lenders”).

The New Credit Agreement provides for a $51,000 secured term loan and a $25,000 secured revolving credit facility. The revolving credit facility is used to finance the working capital needs and general corporate purposes of the Company and its subsidiaries and for permitted acquisitions. As of September 30, 2012, $50,000 in term loans and $9,425 in revolving loans were outstanding under the New Credit Agreement.
 

 
24

 
Contractual Obligations
 
Certain contractual cash obligations and other commercial commitments will impact our short and long-term liquidity.  At September 30, 2012, such obligations and commitments are as follows:
 
   
Total
   
Less than 1
Year
   
1 – 3
Years
   
4 - 5
Years
   
After 5
Years
 
Principal payments of long-term debt
  $ 59,425     $ 6,000     $ 53,425     $ -     $ -  
Capital lease obligations
    29,042       1,503       3,097       3,222       21,220  
Purchase obligations
    23,158       23,158       -       -       -  
Operating leases
    888       581       288       19       -  
Defined benefit plan payments
    663       54       111       128       370  
                                         
Total contractual obligations
  $ 113,176     $ 31,296     $ 56,921     $ 3,369     $ 21,590  

Related Party Transactions

As part of the assets and liabilities acquired from the AVID acquisition, the Company assumed a capital lease obligation for the AVID facility located in Toano, Virginia. The facility, which includes a 185,000 square foot manufacturing and warehouse building and approximately 12 acres of land, is owned by Micpar Realty, LLC (“Micpar”). AVID’s founder and former CEO, is a part owner of Micpar and subsequent to the acquisition of AVID, he was elected to the Company’s board of directors.  As of August 2012, he no longer serves on the Company’s board of directors.

The gross amount and related accumulated amortization of the AVID facility is as follows:
 
   
September 30,
2012
   
March 31,
2012
 
Plant and fixed equipment
  $ 11,409     $ 11,409  
Less: Accumulated amortization
    (1,279 )     (972 )
    $ 10,130     $ 10,437  
 
During the three and six months ended September 30, 2012 and 2011, the Company recorded $153 (of which $35 is included in our cost of sales and $118 is included in our selling, general and administrative expenses) and $307 (of which $71 is included in our cost of sales and $236 is included in our selling, general and administrative expenses) of amortization expense associated with the capital lease, respectively.

As of September 30, 2012, the capital lease requires monthly payments of $124 with increases of 2% per annum. The lease contains provisions for an option to buy after three and five years and expires in March 2029. The effective rate on the capital lease obligation is 9.9%. Total lease payments required under the capital lease for the five-year period ending September 30, 2017 is $7,824.  During the six months ended September 30, 2012, the Company recorded interest expense of $678 under the lease agreement.

A current member of the Company’s board of directors is currently a minority shareholder in Custom Healthcare Systems (CHS), an assembler and packager of Class 1 medical products. CHS is a supplier to our AVID facility located in Toano, Virginia for small kits and trays. They also purchase sterile instruments from our facility located in Arden, North Carolina. CHS sold approximately $453 and $889 in small kits and trays to the Company during the three and six months ended September 30, 2012, respectively and purchased approximately $200 and $463 in sterile instruments from the Company during the three and six months ended September 30, 2012.  As of September 30, 2012, $239 was due to the Company from CHS and $28 was due to CHS from the Company.

 
25

 
Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.


Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate change market risk with respect to its credit facility with a financial institution which is priced based on the alternate base rate of interest plus a spread of up to 3%, or at LIBOR rate plus a spread of up to 4%. The Company decides at its sole discretion as to whether borrowings will be at the alternate base rate or LIBOR. At September 30, 2012, $59,425 was outstanding under the credit facility. Changes in the alternate base rates or LIBOR rates during fiscal 2013 will have a positive or negative effect on the Company’s interest expense. Each 1% fluctuation in the interest rate will increase or decrease interest expense for the Company by approximately $594 on an annualized basis.

A significant portion of the Company’s raw materials are purchased from China. All such purchases are transacted in U.S. dollars. The Company’s financial results, therefore, could be impacted by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign countries in the procurement of such raw materials. To date, sales of the Company’s products outside the United States have not been significant.


Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of the end of the period covered by this Report. Based upon that evaluation, the Company’s management concluded that, as of September 30, 2012, our disclosure controls and procedures were effective.

 
26

 

Changes in Internal Control Over Financial Reporting

During the three months ended September 30, 2012, we have not made any changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

We continue to review, document and test our internal control over financial reporting and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. These efforts may lead to various changes in our internal control over financial reporting.

 
27

 
OTHER INFORMATION


  Legal Proceedings
       
    As of November 5, 2012, the Company is involved in two product liability cases, which are covered by insurance. While the results of the 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.
       
  Risk Factors
       
    Additional Risk Factors
       
    There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.
       
  Unregistered Sales of Equity Securities and Use of Proceeds
       
    None
       
  Defaults Upon Senior Securities
       
    None
       
  Mine Safety Disclosures
       
    None
       
  Other Information
       
    None
     
  Exhibits and Reports on Form 8-K
 
     
    (a)
Exhibits
       
      31.1 and 31.2 – Certifications pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
       
     
32.1 and 32.2 – Certifications pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002
       
     
101 – The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in eXtensible Business Reporting Language (XBRL); (i) the Condensed Consolidated Balance Sheets (Unaudited), (ii) the Condensed Consolidated Statements of Operations (Unaudited), (iii) the Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited) and (v) Notes to the Condensed Consolidated Financial Statements (Unaudited)
 

 
28

 
 
       
    (b)
Reports on Form 8-K
       
     
Current Report on Form 8-K dated August 9, 2012, covering Item 3.01 – Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing and Item 5.07 – Submission of Matters to a Vote of Security Holders
       
     
Current Report on Form 8-K dated September 21, 2012, covering Item 7.01 – Regulation FD Disclosure and Item 9.01 – Financial Statements and Exhibits
       
     
Current Report on Form 8-K dated November 2, 2012, covering Item 5.02 – Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
       
     
Current Report on Form 8-K dated November 2, 2012, covering Item 2.02 – Results of Operations and Financial Condition and Item 9.01 – Financial Statements and Exhibits
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
     
Dated: November 5, 2012
By:
/s/ John Sheffield
   
John Sheffield
   
Executive Vice President and Chief Financial Officer
     
 
 
 
 
 
 
 
 
 29

EX-31.1 2 exh_311.htm EXHIBIT 31.1 exh_311.htm
Exhibit 31.1

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

 
I, Paul D. Meringolo, certify that:
 
1. 
I have reviewed this report on Form 10-Q of Medical Action Industries Inc. (the “registrant”);
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.  
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions):
 
a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: November 5, 2012

/s/ Paul D. Meringolo
 
Paul D. Meringolo
President and Chief Executive Officer
 
 
EX-31.2 3 exh_312.htm EXHIBIT 31.2 exh_312.htm
‎‎Exhibit 31.2

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002


I, John Sheffield, certify that:
 
1. 
I have reviewed this report on Form 10-Q of Medical Action Industries Inc. (the “registrant”);
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions):
 
a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: November 5, 2012

/s/ John Sheffield
 
John Sheffield
Executive Vice President and Chief Financial Officer
 
 
 
 
 
EX-32.1 4 exh_321.htm EXHIBIT 32.1 exh_321.htm
Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Quarterly Report on Form 10-Q of Medical Action Industries Inc. (the “Company”) for the quarter ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Paul D. Meringolo, President and Chief Executive Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




/s/ Paul D. Meringolo
 
Paul D. Meringolo
President and Chief Executive Officer
 
   
   
Date: November 5, 2012
 
 
EX-32.2 5 exh_322.htm EXHIBIT 32.2 exh_322.htm
Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Quarterly Report on Form 10-Q of Medical Action Industries Inc. (the “Company”) for the quarter ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, John Sheffield, Executive Vice President and Chief Financial Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ John Sheffield
 
John Sheffield
Executive Vice President and Chief Financial Officer
 
   
   
Date:  November 5, 2012
 
 
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(&#8220;Medical Action&#8221; or the &#8220;Company&#8221;) have been prepared in accordance with accounting principles generally accepted in the United States of America (&#8220;US GAAP&#8221;) for interim financial information and with the instructions to Form 10-Q for quarterly reports under section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013. For further information, refer to the financial statements and footnotes thereto included in the Company&#8217;s 2012 Annual Report on Form 10-K.</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">A summary of the Company&#8217;s significant accounting policies is identified in Note 1 &#8220;Organization and Summary of Significant Accounting Policies&#8221; of the Company&#8217;s 2012 Annual Report on Form 10-K. Users of financial information produced for interim periods are encouraged to refer to the notes contained in the 2012 Annual Report on Form 10-K when reviewing interim financial results. There have been no changes to the Company&#8217;s significant accounting policies or to the assumptions and estimates involved in applying these policies. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. All dollar amounts presented in our notes to condensed consolidated financial statements are presented in thousands, except share and per share data.</font> </div><br/> <div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Note 2. Summary of Significant Accounting Policies</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The preparation of consolidated annual and quarterly financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We have made a number of estimates and assumptions in the preparation of these consolidated financial statements. We can give no assurance that actual results will not differ from those estimates. Some of the more significant estimates include allowances for trade rebates and doubtful accounts, realizability of inventories, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability, pensions and other postretirement benefits and environmental and litigation matters.</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company determined the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair values because of their short-term nature.&#160;&#160;The Company determined that the carrying amounts of borrowings outstanding under its revolving credit facility and term loan approximate fair value since such borrowings bear interest at variable market rates.</font> </div><br/> <div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The preparation of consolidated annual and quarterly financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We have made a number of estimates and assumptions in the preparation of these consolidated financial statements. We can give no assurance that actual results will not differ from those estimates. Some of the more significant estimates include allowances for trade rebates and doubtful accounts, realizability of inventories, goodwill and other intangible assets, depreciation and amortization of long-lived assets, product liability, pensions and other postretirement benefits and environmental and litigation matters.</font></div> <div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company determined the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair values because of their short-term nature.&#160;&#160;The Company determined that the carrying amounts of borrowings outstanding under its revolving credit facility and term loan approximate fair value since such borrowings bear interest at variable market rates.</font></div> <div style="TEXT-INDENT: 0pt; DISPLAY: block"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">Note 3. 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Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The adoption of this disclosure-only guidance will not have an impact on the Company&#8217;s consolidated financial results and was effective for the Company on April 1, 2012. 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Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011.&#160;&#160;The Company early adopted the guidance in the third quarter of fiscal 2012. 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CHS is a supplier to our AVID facility located in Toano, Virginia for small kits and trays. They also purchase sterile instruments from our facility located in Arden, North Carolina. 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