Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. MEDICAL ACTION INDUSTRIES INC (748270) 10-K/A published on Sep 29, 2014 at 5:50 pm
Reporting Period: Mar 30, 2014
Medical Action Industries Inc. (“Medical Action” or the “Company”) was incorporated under the laws of the State of New York on April 1, 1977, and re-incorporated under the laws of the State of Delaware on November 5, 1987. Headquartered in Brentwood, New York, Medical Action develops, manufactures, markets and supplies a variety of disposable medical products. The Company’s products are marketed primarily to acute care facilities throughout the United States and certain international markets, and in recent years the Company has expanded its end-user markets to include physician, dental and veterinary offices, outpatient surgery centers and long-term care facilities. Medical Action is a leading manufacturer and supplier of custom procedure trays, collection systems for the containment of medical waste, minor procedure kits and trays, disposable patient utensils, sterile operating room towels and sterile laparotomy sponges. The Company’s products are marketed by its direct sales personnel and an extensive network of health care distributors. Medical Action has entered into preferred vendor agreements with national and regional distributors, as well as sole and multi-source agreements with group purchasing organizations. The Company also offers original equipment manufacturer products under private label programs to supply chain partners and medical suppliers. Medical Action’s manufacturing, packaging and warehousing activities are conducted in its Arden, North Carolina and Toano, Virginia facilities. The Company’s procurement of certain products and raw materials from the People’s Republic of China is administered by its office in Shanghai, China. During fiscal 2014, we also conducted manufacturing, packaging and warehousing activities at our Clarksburg, West Virginia and Gallaway, Tennessee facilities. These facilities were part of the assets sold in the Patient Care business unit divestiture completed on June 2, 2014 (the "Transaction"), as disclosed in Footnote 3 – Discontinued Operations.
All dollar amounts presented in the notes to consolidated financial statements are presented in thousands, except share and per share data.
The models used to determine the fair value of the Company in step one and the intangible assets in step two relied heavily on management’s assumptions. These assumptions, which are significant to the calculated fair values, are considered Level 3 inputs under the fair value hierarchy established by ASC 820 – Fair value measurement and disclosures , as they are unobservable. The assumptions in step one included a discount rate, revenue growth rates, tax rates and operating margins. In addition, the step two assumptions included customer attrition rates and royalty rates. The discount rate represents the expected return on capital. The discount rate was determined using a target structure of 15% debt and 85% equity. The Company used the 20-year U.S. Treasury bond yield to determine the risk-free rate in its weighted average cost of capital calculation. The projected growth rates and terminal growth rates are primarily driven by management’s estimate of future performance, giving consideration to historical performance and existing and anticipated economic and market conditions. Attrition assumptions used to value customer relationships are based on historical experience and management estimates based on historical financial information. To determine the royalty rates used to value trade names, the Company used industry benchmarks from licensing transactions. The assumption for tax rates are based on management’s estimates of blended federal and state income tax rates. Operating margin assumptions are based management’s estimate of future performance, giving consideration to historical performance and projected economic and competitive conditions.
Borrowings under the New Credit Agreement are collateralized by substantially all the assets of, and are fully guaranteed by, the Company and its subsidiaries. The New Credit Agreement contains certain restrictive covenants, including, among others, covenants limiting our ability to incur indebtedness, grant liens, guarantee obligations, sell assets, make loans and investments, enter into merger and acquisition transactions, and declare or make dividends. The Company committed to certain post-closing conditions, including providing monthly financial statements, annual updates of financial projections, and the filing of a mortgage on the Company’s Brentwood, New York corporate headquarters. If the Company’s Excess Availability (as defined in the New Credit Agreement) falls below a specified amount, the Company will become subject to financial covenants relating to a minimum fixed charge coverage ratio of 1.00 to 1.00, measured on a month-end basis. If the Company draws a Delayed Draw Term Loan, the Company will be required to comply with a maximum leverage financial ratio covenant ranging from 3:00 to 1:00 to 3.25 to 1:00, measured on a month-end basis.
The Company’s Tennessee facility, which is comprised of approximately 25 acres in a light industrial park located in Gallaway, Tennessee, was acquired by Medegen Medical Products, LLC in 1999 prior to the Company’s ownership of Medegen. In connection with an environmental due diligence evaluation of the facility prior to its acquisition by Medegen, consultants detected the presence of chlorinated solvents in groundwater beneath the manufacturing plant. The identified groundwater contamination is in the process of being remediated. At the time of our acquisition of Medegen, the prior owner of the facility agreed to retain responsibility for the remediation of the contamination and to fully indemnify our company for all costs associated with the environmental remediation as well as any claims that might arise, including third party claims. Under an agreement executed at the time of the sale, Vollrath Group, Inc. and its parent Windway Capital Corp. (collectively, “Indemnitor”) are required, on a quarterly basis, to provide documentation from independent parties confirming that Indemnitor has sufficient assets, in the form of unencumbered, unrestricted cash, marketable securities or unused and available borrowing capacity, as necessary to pay the most recently estimated costs of outstanding environmental remediation obligations. Now that full-scale remediation is underway at the site, Indemnitor is also required to provide Letters of Credit (“LC”) to secure its current and future obligations, including a $2,000 LC that is currently open and future LCs in the amount of $1,000 from December 7, 2014 through December 7, 2017. As of March 31, 2014, we have recorded an estimated liability of $4,200 to remediate the groundwater contamination and corresponding amount due from the Indemnitor. As part of the divestiture of the Patient Care business unit, the related asset and liabilities are reported as held for sale at March 31, 2014 (see Footnote 3 – Discontinued Operations).