748270--6/11/2007--MEDICAL_ACTION_INDUSTRIES

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Our integration of the acquisition of Medegen Medical Products, LLC ( Medegen ) is ongoing and we may incur substantial costs to achieve, and may not be able to realize, the anticipated cost savings, synergies or revenue enhancements from integrating Medegen s operations with our current business. demands on management related to the significant increase in the size of the business for which they are responsible; diversion of management s attention from the management of daily operations to the integration of operations; difficulties in the assimilation of difference corporate cultures, practices and sales and distribution methodologies, as well as in the assimilation and retention of extensive and geographically dispersed operations and personnel; difficulties and unanticipated expenses related to the integration of departments, information technology systems, including accounting systems, technologies and procedures, as well as in maintaining uniform standards, including internal accounting controls, procedures and policies; and costs and expenses associated with any undisclosed or potential liabilities. Indemnification for Remediation of Tennessee facility The Medegen Medical Products, LLC ( Medegen ) Tennessee facility is comprised of approximately 20 acres in a light industrial park, located in Gallaway, TN. During 1998, as part of due diligence activities prior to the acquisition of the facility by Medegen, consultants found chlorinated solvents in the groundwater adjacent to the manufacturing plant, which is in the process of being remediated. Medegen is fully indemnified by the prior owner ( Indemnitor ) for all The Company may be unable to successfully manage growth, particularly if accomplished through acquisitions. In addition to the above risks, future acquisitions may result in the dilution of earnings and the amortization or write-off of goodwill and intangible assets, any of which could have a material adverse affect on our business, financial condition or results of operations. The Company s business is subject to the risks of international procurement. Although the Chinese yuan has traded virtually in a straight line for many years, beginning in fiscal 2006 the Chinese government began to re-value the Chinese yuan against other currencies, including the U.S. dollar. This re-valuation or free floating exchange rate, has caused the price of many items that are sourced from China to increase, which could adversely impact the Company s cost of goods sold and profitability. Covenants in our credit facilities may restrict our financial and operating flexibility. We currently have two credit facilities; A five year $10 million revolving credit facility, of which we had no borrowings outstanding as of June 1, 2007; and A $65 million term loan payable in twenty consecutive equal quantity installments. As of June 1, 2007, $57,750,000 is outstanding on the term loan. A $65 million term loan payable in twenty consecutive equal quantity installments. As of June 1, 2007, $57,750,000 is outstanding on the term loan. Our current credit facility requires, and any future credit facilities may also require, that we comply with specified financial covenants relating to interest coverage, debt coverage, minimum consolidated net worth, and earnings before interest, taxes, depreciation and amortization. Our ability to satisfy these financial covenants can be affected by events beyond our control, and we cannot give assurance that we will meet the requirements of these covenants. These restrictive covenants could affect our financial and operational flexibility, including the following: limiting our ability to fund working capital, capital expenditures, acquisitions or other general corporate purposes; requiring us to use a substantial portion of our cash flow from operations to pay interest and principal on our indebtedness, which will reduce the funds available to us for purposes such as potential acquisitions, capital expenditures, marketing, development and other general corporate purposes; vulnerability to fluctuations in interest rates, as a substantial portion of our indebtedness bears variable rates of interest, including an interest rate hedging agreement; reducing our flexibility in planning for, or responding to, changing conditions in our business and our industry; limiting our ability to borrow additional funds; and making us more vulnerable to general economic downturns and adverse developments in our business. Future operating results are dependent upon the Company s ability to obtain a sufficient supply of raw materials, some of which are available only from limited sources volatility of resin cost. The Company s success depends largely on its ability to attract and retain key personnel. Failure of the Company s information technology systems could adversely affect the Company s future operating results. During fiscal 2007, the Company implemented a new software system, mySAP software suite. The Company has estimated the effective operational cost for the new software. However, these estimates are based upon several factors including, the hiring and retaining of technical resources, availability of functional business people, accuracy of our current data, and additional requirements resulting from the Medegen acquisition. In the event that such factors are delayed or significantly modified, the cost of the implementation could be significantly increased and have a material effect on the Company s business and financial condition. The high level of competition and buying groups place pressure on our profit margins and we may not be able to compete successfully. The disposable medical device segment of the healthcare industry in which we operate is highly competitive and is experiencing both horizontal and vertical consolidation. All of the products which we sell are available from sources other than us. The high level of competition in our industry places pressure on profit margins. Some of our competitors have greater resources than we have. These competitive pressures could have a material adverse affect on our business, financial condition or results of operations. The Company s products may be subject to recall or product liability claims. The Company s products are used in connection with surgical procedures and in other medical contexts in which it is important that those products function with precision and accuracy. If the Company s products do not function as designed, or are designed improperly, the Company may be forced by regulatory agencies to withdraw such products from the market. In addition, if medical personnel or their patients suffer injury as a result of any failure of the Company s products to function as designed, or an inappropriate design, the Company may be subject to lawsuits seeking significant compensatory and punitive damages. Any product recall or lawsuit seeking significant monetary damages may have a material affect on the Company s business and financial condition. If a natural or man-made disaster strikes our manufacturing facilities, we may be unable to manufacture our products for a substantial amount of time, which may adversely affect our expected results of operations. A significant adverse change in, or failure to comply with, governing regulations could adversely affect the Company s business. The Company is dependent on manufacturing and logistic services provided by third-parties and related risks. Many of the Company s products are manufactured in whole or part The cost of designing, implementing and staffing an effective corporate governance program to meet current and proposed regulations could affect the Company s future operating results. The Company quarterly revenue and operating results may fluctuate for a variety of reasons. The Company s profit margins vary among its products and its distribution channels. As a result, the overall profitability of the Company in any given period will depend, in part, on the product, geographic, and channel mix reflected in that period s net sales. Changes in accounting rules could adversely affect the Company s future operating results. Financial statements are prepared in accordance with U.S. generally accepted accounting principles. These principles are subject to interpretation by various governing bodies, including the Financial Accounting Standards Board ( FASB ) and the SEC, who interpret and create appropriate accounting regulations. A change from current accounting regulations, or the interpretations thereof, can have a significant affect on the Company s results of operations and could impact the manner in which the Company conducts business. Unanticipated changes in the Company s tax rates could affect its future results. The market price of the Company s common stock has been, and may continue to be volatile. The market price of the Company s common stock has been, and may continue to be, highly volatile for various reasons, including the following: quarter-to-quarter variances in the Company s financial results; claims involving potential infringement of patents and other intellectual property rights; analyst and other projections or recommendations regarding the Company s common stock or medical device stocks generally; any restatement of the Company s financial statements or any investigation into the Company by the SEC or another regulatory authority; a general decline, or rise, of stock prices in the capital markets generally; a general decline, or rise, of stock prices in the capital markets generally; investors concerns regarding the credibility of corporate financial reporting and integrity of financial markets; announcements by us or our competitors of new products and service offerings, significant contracts, acquisitions or strategic relationships; additions or departures of key personnel; and the trading volume of our common stock. Anti-Takeover provisions of our charter documents and Delaware law could prevent or delay transactions resulting in a change of control. Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions: establish a classified board of directors, so that not all members of our board may be elected at one time; set limitations on the removal of directors; limit who may call a special meeting of stockholders; establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings; prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; provide our board of directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval; and require a super-majority vote for mergers and certain other business combinations without approval by a majority of the board of directors.

Full 10-K form ▸

748270--6/11/2007--MEDICAL_ACTION_INDUSTRIES_INC