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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission File number 1-11831
SABRATEK CORPORATION
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(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 36-3700639
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 West Howard Street, Niles, Illinois 60714
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(address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (847) 647-2760
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the Common Stock, par value $.01 per
share, held by non-affiliates based upon the reported last sale price of the
Common Stock on February 28, 1997 was approximately $121,500,000.
As of February 28, 1997, there were 8,374,229 shares of Common Stock,
par value $.01 per share, outstanding.
The Index to Exhibits appears on page 33.
Documents Incorporated by Reference
The registrant's definitive 1997 Proxy Statement which will be filed
pursuant to Regulation 14A is incorporated by reference into Part III of this
Annual Report on Form 10-K.
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SABRATEK CORPORATION
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 15
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . 18
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . 32
PART III
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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The following trademarks and service marks appear in this Annual
Report: SABRATEK(R) and its logo, AutoRamp(R), HOMERUN(R), SEAMLESS DELIVERY
SYSTEM(TM), PumpMaster(TM), MediVIEW(R) and TCS Total Compliance System(TM).
The Company has also filed a foreign trademark application for the name
SABRATEK(TM) and its logo in Japan.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Sabratek develops, produces and markets technologically-advanced,
user-friendly and cost-effective therapeutic and diagnostic medical systems
designed specifically to meet the unique needs of the alternate-site health
care market. The Company's multi-therapy infusion and other systems incorporate
advanced communications technology which is designed to reduce provider
operating costs while maintaining the integrity and quality of care. Sabratek's
proprietary health care information system provides remote programming as well
as real-time diagnostic and therapeutic data capture capabilities, allowing
caregivers to monitor patient compliance more effectively and allowing
providers to develop outcome analyses and optimal clinical protocols. The
Company has designed its integrated hardware and software system to permit
providers of infusion therapy to achieve cost-effective movement of patients
along the continuum of alternate-site health care settings. Substantially all
of the Company's revenues have historically been derived from the sale of its
multi-therapy infusion pumps and related disposable supplies. Since August,
1996, the Company has commercially introduced several additional products
which it believes will contribute to future revenues.
On February 25, 1997, Sabratek acquired substantially all the assets
of Rocap, Inc. ("Rocap") for $100,000 in cash, 131,593 shares of Sabratek
Common Stock (valued at approximately $2.9 million), plus the assumption of net
liabilities of approximately $661,000 and the forgiveness of a bridge loan. In
connection with the acquisition, the former President of Rocap entered into a
three-year employment agreement with Sabratek. Rocap produces and markets
prepackaged injectable prescription pharmaceuticals (intravenous or "I.V."
Admixture products) and pre-filled I.V. tubing flush syringes for the
alternative-site and acute-care markets.
CHANGING HEALTH CARE ENVIRONMENT
The alternate-site health care industry, which includes the delivery
of skilled nursing services, intravenous infusion, respiratory therapy,
physical therapy and pharmaceutical therapies in the home, long-term care
facilities, physicians' offices and outpatient centers, has grown significantly
during the past decade. The Company believes that the alternate-site health
care industry will continue to benefit from cost-containment measures which
governmental and private payors have employed to reduce hospital admissions and
lengths of stays in hospitals. The Company believes that such measures will
continue the increase in the use of alternate-site health care due to its
significantly lower cost when compared to similar care provided in traditional
health care settings. In addition to cost savings, the alternate-site health
care industry should continue to benefit from advances in medical technology
which have facilitated the provision of sophisticated care outside the
hospital. Many disease states, including pulmonary diseases, neurological
conditions, infectious diseases, digestive disorders, AIDS-related symptoms,
various forms of cancer and related medical conditions such as pain and nausea,
are now being treated in alternate-site settings, including the home.
A significant component of alternate-site health care is infusion
therapy, which involves the administration of fluid intravenously at a
regulated rate and volume. Alternate-site infusion therapy has historically
been the fastest-growing segment of the alternate-site health care market.
Infusion therapy is used in a wide range of applications such as nutrition
therapy, pain management, delivery of antibiotics, pregnancy and obstetrical
therapies, chemotherapy, cardiovascular therapy and immunosuppressive therapy.
These therapies generally require the use of
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specialized infusion pumps to deliver precise dosages of fluids such as
nutrients, parenteral solutions, anti-infectives, chemotherapeutic agents,
narcotic analgesics and a variety of other drugs.
Due to the shift by managed care payors toward fixed fee or capitated
payment arrangements, providers of infusion therapy are being forced to reduce
costs without compromising the quality of care in order to maintain
profitability. The costs associated with providing infusion therapy are
composed of three general components: capital equipment, supplies and labor.
Traditionally, providers of infusion therapy needed to purchase multiple types
of infusion pumps and related back-up inventory because most pumps delivered
only one type of therapy. This requirement to purchase several single therapy
pumps also results in increased labor training costs because of the need to
learn multiple programming protocols. The delivery of infusion therapy requires
a substantial amount of non-clinical nursing time. The Company believes that
reducing the labor costs of delivering infusion therapy is critical for
alternate-site health care providers to achieve operating efficiencies. The
Company believes that products and technology which reduce the cost of
providing infusion therapy, especially the labor component, will be attractive
to health care payors in general and providers of infusion therapy in
particular.
PRODUCTS
SABRATEK'S SEAMLESS DELIVERY SYSTEM. Sabratek's software-based
infusion devices and related interactive information system and pump testing
device are designed to provide both health care professionals and patients with
ease of use and a smooth transition throughout the health care delivery
spectrum. Sabratek's Seamless Delivery System product design is the Company's
strategic response to the need to achieve cost-effective movement of patients
from a hospital setting to an alternate-site setting, and among the various
stages in alternate-site care, from sub-acute to home care, with maximum ease
of transition. The SEAMLESS DELIVERY SYSTEM maximizes the similarities between
Sabratek's stationary and ambulatory infusion devices and is intended to allow
both patients and health care providers to use both types of infusion devices
interchangeably, as the specific setting or therapy dictates, and with greater
ease. This ability reduces the amount of time health care professionals must
spend training on multiple operating systems as well as administering and
monitoring therapies. In addition, Sabratek's infusion devices have the
flexibility to provide multiple therapies which allows providers to minimize
their equipment inventories. Sabratek's infusion devices intravenously deliver
therapeutic agents to address treatments for a wide variety of conditions,
including, among others, antibiotic therapy for viral or bacterial infections,
chemotherapy for cancer, pain management for chronic pain, clotting agents for
hemophilia and various therapies for pregnancy and obstetrics.
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The following table summarizes certain information with respect to the
Company's products:
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PRODUCT DESCRIPTION STATUS
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INFUSION PUMPS
3030 Stationary Pump . . . . . . . . Stationary, multi-therapy Commercially available since
infusion device 1992(1)(2)(3)
6060 Ambulatory Pump . . . . . . . . Ambulatory, multi-therapy Commercially available since
infusion device 1995(2)(4)
INFUSION SUPPLIES
3030 Infusion Sets . . . . . . . . . Non-proprietary, disposable Commercially available since
tubing sets for use with 1992
3030 Stationary Pump
6060 Infusion Sets . . . . . . . . . Proprietary, disposable Commercially available since
tubing sets for use with 1995(1)(2)(3)
6060 Ambulatory Pump
I.V. Admixture Products . . . . . . . Prepackaged, injectable, Commercially available since
prescription pharmaceuticals 1995
Pre-filled Syringe Products . . . . . Pre-filled I.V. tubing flush Commercially available since
syringes 1996(2)
INTERACTIVE PROGRAMMING AND MONITORING SOFTWARE
MediVIEW . . . . . . . . . . . . . . Proprietary, PC-based Commercially available since
software that allows remote 1996(2)
and real-time programming,
monitoring and data capture
AUTOMATIC DIAGNOSTIC TESTING DEVICE
PumpMaster . . . . . . . . . . . . . Proprietary, portable, Commercially available since
automatic diagnostic device 1996(2)
for the testing of Sabratek
infusion pumps
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(1) Patent(s) issued in the United States.
(2) United States and/or foreign patents pending.
(3) Foreign patent issued.
(4) U.S. patents allowed.
SABRATEK 3030 -- STATIONARY MULTI-THERAPY INFUSION PUMP. The
Company's 3030 Stationary Pump is an electromechanical, volumetric infusion
device that is able to deliver a wide variety of infusion therapies including,
among others, chemotherapy, antibiotics, circadian rhythms and total parenteral
nutrition under three standard and one customizable delivery modes. The 3030
Stationary Pump incorporates multiple language capabilities, remote
communications and pre-programming capabilities, a state-of-the-art ergonomic
design and a relatively easy-to- learn programming format. The 3030 Stationary
Pump operates with leading brands of disposable tubing as well as Sabratek's
own line of non- proprietary disposable tubing.
SABRATEK 6060/HOMERUN -- AMBULATORY MULTI-THERAPY INFUSION PUMP. The
Company's 6060 Ambulatory Pump weighs approximately 13 ounces and can be worn
discreetly by a patient. The 6060 Ambulatory
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Pump was designed as a complementary product to the 3030 Stationary Pump and,
when combined with the use of the 3030 Stationary Pump, provides a seamless
transition between the bed and an ambulatory state, or vice versa, with minimal
additional training. The 6060 Ambulatory Pump has delivery capabilities and a
programming format that are similar to the 3030 Stationary Pump, with the
addition of a pre-programmed capability to deliver pain management infusion
therapy. The 6060 Ambulatory Pump also has the ability to work in conjunction
with the MediVIEW software and utilizes a proprietary disposable tubing set.
DISPOSABLE INFUSION SUPPLIES. The Company sells non-proprietary
disposable tubing sets for use with the 3030 Stationary Pump and proprietary
disposable tubing sets for use exclusively with the 6060 Ambulatory Pump. The
Company has begun offering I.V. Admixture and pre- filled syringe products as
the result of a recent acquisition of Rocap.
MEDIVIEW -- REMOTE PROGRAMMING, MONITORING AND DATA CAPTURE SOFTWARE
SYSTEM. MediVIEW is a proprietary software system designed to allow providers
to program and monitor Sabratek's infusion pumps and capture data for reporting
and clinical purposes from remote locations over standard telephone lines. The
Company has designed MediVIEW to enable alternate-site health care providers
using the 3030 Stationary Pump and 6060 Ambulatory Pump combined with MediVIEW
to: (i) remotely monitor and program the Company's pumps on a real-time basis,
(ii) receive instantaneous notification of alarm activation and immediately
respond from the provider's physical location, (iii) automatically record and
"package" data regarding the outcomes of actual therapy courses for specific
case management and clinical as well as administrative/reimbursement purposes,
and (iv) develop a proprietary clinical protocol and outcomes database useful
to providers in managed care cases. In addition, patients who receive therapy
on the Company's infusion products should derive greater comfort because their
providers will be able to monitor their therapies on a real-time basis. The
first release of MediVIEW became commercially available in the third quarter of
1996.
PUMPMASTER -- PORTABLE, AUTOMATIC DIAGNOSTIC DEVICE FOR THE TESTING OF
SABRATEK INFUSION PUMPS. The PumpMaster is a portable device designed to
enable providers to perform on-site diagnostic tests on Sabratek's infusion
devices. Pursuant to suggested standards adopted by the Joint Commission for
the Accreditation of Healthcare Organizations ("JCAHO"), an industry group
which promulgates standards relating to the provision of alternate-site health
care, the performance of every infusion pump is required to be re-certified on
the earlier of the date on which such pump is provided to a new patient for
their use or the date which is 12 months from the date of the last
certification. The Company believes that it is not cost-efficient for providers
to maintain in-house bio-medical engineering resources on a branch level to
perform pump re-certification. Instead, providers typically ship their pumps
for remote-site testing and, as a result, are required to maintain costly back-
up pump inventory. The PumpMaster is intended to obviate such incremental
capital expenditure outlays as well as eliminate the cost of outside infusion
pump testing. The PumpMaster is designed to conduct automatically, in
approximately ten minutes, all tests typically performed as part of JCAHO
re-certification. PumpMaster became commercially available in the fourth
quarter of 1996.
SALES AND MARKETING
The Company sells its products to a diverse group of customers in the
alternate-site health care industry such as sub-acute skilled nursing care
facilities, home health care providers, physicians' offices, clinics, surgery
centers and long-term care facilities. This group of customers ranges in size
from national and regional chains to local independent operators. The Company's
products are also sold to hospitals. Key decision makers include nursing,
pharmacy, purchasing and bio-medical departments, as well as physicians.
As of December 31, 1996, the Company's domestic sales force consisted
of 17 direct sales professionals, six clinical support staff and two full-time
sales consultants as well as a network of domestic distributors each of whom
covers an exclusive geographic territory. In certain limited geographic areas,
the distributors are directly involved in sales and implementation; in others,
the distributors act as support to the new client implementation process. The
Company's distributors have been selected for their experience in and focus on
the infusion therapy
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market, coverage of specific geographical areas, product sales support and
regional dominance. The Company's sales management team trains the sales
personnel of each of the distributors and provides them with all product
information and other relevant field literature. In addition, Sabratek's direct
sales representatives coordinate and manage national account activity. The
Company's marketing and sales efforts are supported by advertising in trade
journals, new product literature and attendance at trade shows. The Company
believes that its existing sales force and distribution network provide the
necessary infrastructure to market its current products and those under
development.
The Company has also entered into distribution agreements with
distributors in South America, Europe, the Middle East, Asia and Africa. For
the year ended December 31, 1996, international sales accounted for
approximately 9% of the Company's total sales. The Company perceives the
international marketplace as a potential area for future growth. The Company
has distribution agreements in Japan and Germany, which it believes are among
the largest international markets for infusion systems, and will commence
marketing its products in these countries upon receipt of regulatory approval.
Currently, all of the Company's international sales are invoiced and paid in
U.S. dollars.
The Company has enhanced its domestic sales effort through an
affiliation with Americorp Financial, Inc. ("Americorp") to provide leasing
services to the Company's domestic customers. Americorp has licensed the name
"Sabratek Credit Corporation" from the Company and offers financing for the
acquisition of Sabratek products under both capital and operating leases.
RESEARCH AND DEVELOPMENT
The Company is committed to continued product innovation and has
invested approximately $1.0 million, $2.2 million and $1.1 million in research
and development for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company's research and development effort is supported by a
staff of twelve electrical, mechanical and software engineers who have
extensive experience in the design and development of electromechanical
infusion therapy devices, other medical instrumentation and software.
Sabratek's engineering team closely coordinates its design activities with the
Company's sales and marketing team. This group solicits extensive pre-design
focus group input from constituencies that use or are impacted by the use of
Sabratek's products, but who may possess a host of different strategic,
economic and other objectives.
Sabratek's research and development program is focused on both new
product development and enhancements of existing products. The Company's
product development efforts include advancements in infusion therapy,
interactive software systems, vital signs monitoring, blood gas monitoring and
whole blood analysis. The Company's product development strategy is based on
developing product platforms that have the flexibility to be configured to
respond to a variety of customer requirements. The Company's product
enhancement efforts are based on the input received from customers after the
initial introduction of its products and focus on addressing customers' needs
in a more cost-effective and comprehensive way.
ASSEMBLY AND MANUFACTURING
Sabratek currently assembles all of its infusion devices at its
facility in Niles, Illinois in an effort to ensure production quality and
control its costs. The Company outsources the manufacture of certain
sub-systems used in its infusion systems. In addition, disposable tubing sets
sold by Sabratek are manufactured by contract manufacturers. Sabratek believes
its use of in-house assembly and contract manufacturing is the most
cost-effective means of producing its products. Additionally, Sabratek's Rocap
division manufactures prepackaged injectable prescription pharmaceuticals and
pre-filled I.V. flush syringes at its facility in Woburn, Massachusetts.
The Company's production process for its infusion devices consists of
assembling major sub-systems as well as the assembly of both standard and
custom components. The standard components can be obtained from a number of
sources. The custom components are produced by both Sabratek as well as by sub-
contractors and, in all cases,
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competitive back-up supply sources exist. The Company believes that, due to
volume discounts, the unit cost of both standard and custom components will
decrease as production volumes increase.
Disposable tubing sets are manufactured to Sabratek's specifications
by third parties in a clean room environment under stringent quality control
procedures covering assembly, storage and sterilization. Set production
consists of the assembly of both standard and custom components. The plastic
custom components are manufactured by a sub-contractor using molds supplied by
the Company. The Company uses more than one manufacturer for the production of
its disposable tubing sets.
QUALITY ASSURANCE
The Company maintains a comprehensive quality assurance program. The
quality assurance program begins with the components and other materials the
Company purchases from vendors. Vendors are required to supply materials which
meet stated specifications. The Company monitors vendors' compliance with the
stated specifications through a program of on-site surveys, audits and product
testing. The Company also employs quality assurance procedures during its
on-site manufacturing and assembly process in an effort to ensure that finished
products meet the standards set by the Company. All finished products are
tested by the Company's separate quality assurance department to ensure that
the Company avoids distributing sub-standard products. Finally, the Company
maintains a post-sale performance monitoring program.
Sabratek provides a one-year warranty on the 3030 Stationary Pump, the
6060 Ambulatory Pump and PumpMaster. This warranty is passed on to the
end-users by the distributors. To provide further product support, the Company
has established an in-house capability for repair, maintenance and upgrade of
its products. The repair and maintenance function utilizes full-time technical
personnel as well as on-going support from temporary and production personnel
as required to service infusion devices. The Company believes the service and
maintenance of its infusion devices require minimal manpower due to the
modularity of such devices' sub-systems, sound quality control procedures and
the service capabilities of distributors.
As part of its quality program, Sabratek provides its customers with
extensive in-service and training in the use of its products. This is provided
by both Sabratek's sales force and its distributors.
INTELLECTUAL PROPERTY
One United States patent and one Australian patent have been issued
for the 3030 Stationary Pump. In addition, two foreign patents are pending for
the 3030 Stationary Pump. For the 6060 Ambulatory Pump, four United States
patents have been allowed (are awaiting the issuance of patent numbers by the
Patent and Trademark Office) and four United States patents are pending. One
United States and one German patent have been issued for the 6060 Infusion Set
and United States and foreign patents are pending on this product. The Company
also has United States and Foreign patents pending for certain aspects of
MediVIEW and PumpMaster. There is one United States patent pending with respect
to the pre- filled syringe products. The Company also requires each of its
employees, consultants and advisors to agree in writing to keep its proprietary
information confidential and to assign all inventions relating to the Company's
business to the Company. There can be no assurance that any unprotected
information will not also be developed by others.
The Company has registered or applied to register the following
trademarks: SABRATEK(R) and its logo, AutoRamp(R), HOMERUN(R), SEAMLESS
DELIVERY SYSTEM(TM), PumpMaster(TM), MediVIEW(R) and TCS Total Compliance
System(TM). The Company has also filed a foreign trademark application for the
name SABRATEK(TM) and its logo in Japan.
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COMPETITION
The Company faces substantial competition. At the present time, the
Company considers its primary competitors to be other marketers of infusion
pumps. The Company believes there are several major competitors in the market
for infusion pump devices, including, but not limited to: Abbott Laboratories;
Advanced Medical, Inc.; Baxter International Inc.; I-Flow Corp.; McGaw, Inc., a
subsidiary of IVAX Corporation, and SIMS Deltec.
Despite the greater size and market share of its competitors, Sabratek
believes that its products compete favorably against the products offered by
its competitors. Sabratek has strategically designed its stationary and
ambulatory pump products to offer cost efficient and convenient transferability
of training/operational procedures and functions. Unlike manufacturers that
offer only a stationary or an ambulatory pump, or offer both but whose products
lack operational integration, Sabratek's SEAMLESS DELIVERY SYSTEM product
design provides health care providers with product standardization which the
Company believes to be critical in achieving operating efficiencies. Sabratek
believes that its products also compete favorably with the products of larger,
more established companies on the basis of other advanced product features.
REIMBURSEMENT
The Company's current products are generally purchased by health care
providers who are reimbursed by third-party payors, including indemnity
insurance companies, managed care organizations and government agencies. Such
health care providers recover the cost of purchasing the Company's products
through reimbursement for services provided using the Company's products. A
recent trend is for providers to contract for services on a capitated basis.
Under those contracts, providers receive a fixed fee for providing service to
patients. In those situations, the providers' profit or loss on the contract is
dependent upon managing its costs.
The Health Care Finance Administration of the U.S. Department of
Health and Human Sevices ("HCFA")coordinates a system of reimbursement for
outpatient hospital procedures, physician office procedures and devices used in
conjunction therewith. Under this system, HCFA determines coverage eligibility,
issues coverage instructions and assigns billing codes called the HCFA Common
Procedures Coding System ("HCPCS") for such procedures and devices under
Medicare and Medicaid. HCFA has established HCPCS billing codes for infusion
devices. Moreover, the HCPCS system is referenced by most third-party payors,
including Medicare and Medicaid, insurance companies and health maintenance
organizations, thereby standardizing coverage identification and billing
identification across a broad spectrum of payor plans. When the use of
FDA-approved infusion devices is prescribed by a physician and determined to be
reasonable and necessary in the treatment of illness, such use is generally
reimbursable under Medicare and Medicaid. Reimbursement by other third-party
payors is dependent upon the coverage provided under the applicable plan.
GOVERNMENT REGULATION
The medical devices and supplies manufactured and marketed by the
Company are subject to regulation by the FDA and, in some instances, by state
and foreign authorities. Pursuant to the FFDCA and the regulations promulgated
thereunder, the FDA regulates the clinical testing, development, manufacture,
packaging, labeling, distribution and promotion of medical devices and
supplies.
Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
("GMP") requirements) and Class II devices are subject to general and special
controls (for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval ("PMA") from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices). Electronic infusion devices and disposable tubing
sets are classified by the FDA as Class II medical devices.
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If a new Class II medical device is substantially equivalent in terms
of safety and effectiveness to a medical device already legally marketed in the
United States, the FDA requirements may be satisfied through a procedure known
as a "510(k) Submission," in which the applicant provides product information
supporting its claim of substantial equivalency. "Substantial equivalence"
means that a device has the same intended use and the same technological
characteristics as the legally marketed device, or the same intended use and
different technological characteristics, provided that it can be demonstrated
that the device is as safe and effective as the legally marketed device, and
does not raise different questions regarding safety and effectiveness. A
"legally marketed device" to which a new device may be compared for a
determination regarding substantial equivalence is a device that was legally
marketed prior to May 28, 1976, when the Medical Device Amendments were added
to the FFDCA, or a device which has been reclassified from Class III to Class
II or I, or a device which has been found to be substantially equivalent
through the 510(k) premarket notification process.
Commercial distribution of a device for which a 510(k) Submission is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a legally marketed device. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than in
the past. This may include a requirement for clinical testing of the device. It
generally takes from four to twelve months from submission of a 510(k) to
obtain a 510(k) clearance, but it may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device,
in which case a PMA may be required, or that additional information is needed
before a substantial equivalence determination can be made, in which case data
from safety and effectiveness tests, including clinical tests, may be required.
The process for preparing and obtaining FDA approval of a PMA is much more
elaborate, time-consuming, and expensive than the process of preparing and
obtaining FDA clearance of a 510(k) Submission and would require the Company,
among other things, to conduct preclinical and clinical trials to demonstrate
the safety and effectiveness of the proposed device. A "not substantially
equivalent" determination or a request for additional information could
significantly delay the market introduction of new products.
The Company received 510(k) clearance to begin marketing the 3030
Stationary Pump in the United States in May, 1992. The Company received 510(k)
clearance for the disposable tubing sets for use with the 3030 Stationary Pump
in March, 1995. In July, 1994, the FDA cleared the 510(k) Submission for the
6060 Ambulatory Pump and disposable tubing sets for use with the 6060
Ambulatory Pump. In June 1996, the Company received 510(k) clearance for the
MediVIEW software system for use with the 3030 Stationary Pump.
The Company believes that its 510(k) clearance for the 6060 Ambulatory
Pump adequately described the MediVIEW software system and, accordingly, that
the original 510(k) clearance for the 6060 Ambulatory Pump permits the Company
to market the MediVIEW software with the 6060 Ambulatory Pump in the United
States. However, there can be no assurance that the FDA would agree with the
Company's determination. If in the future the FDA concluded that the MediVIEW
software system for use with the 6060 Ambulatory Pump required a new 510(k)
Submission, the FDA could prohibit the Company from marketing the MediVIEW
software system for this use until the Company files a new 510(k) Submission
and obtains clearance from the FDA. The FDA could also take regulatory action
against the Company for any prior distribution of the MediVIEW software system
with the 6060 Ambulatory Pump. Alternatively, the FDA could use its discretion
not to take any regulatory steps with regard to this issue.
The PumpMaster is a hardware and software system designed to perform
diagnostic tests on the Company's infusion pumps. The Company has determined
that the PumpMaster does not qualify as a medical device under the statutory
definition and, therefore, did not file a 510(k) Submission with respect to
such product. There can be no assurance that the FDA will agree with the
Company's determination in this regard. If the FDA were to determine that the
PumpMaster is a medical device, it could suspend its commercial distribution
until such time as a 510(k) Submission covering such product has been filed and
cleared. The FDA could also take regulatory action against the Company based on
its prior distribution of the uncleared product. Alternatively, the FDA could
use its discretion not to take any regulatory steps with respect to this issue.
-8-
<PAGE> 11
The FFDCA requires the filing of a new 510(k) Submission when, among
other things, there is a major change or modification in the intended use of
the device or a change or modification, including product enhancements, to a
legally marketed device that could significantly affect its safety or
effectiveness. A device manufacturer is responsible for making the initial
determination as to whether a proposed change to a cleared device or to its
intended use necessitates the filing of a new 510(k) Submission. The Company
has made some enhancements to its currently marketed products without filing
510(k) Submissions. There can be no assurance that the FDA would agree with the
Company's determinations that these enhancements do not require a 510(k)
Submission. Likewise, if the Company determines that any modifications that it
may make to its cleared devices in the future do not require a new 510(k)
Submission, there can be no assurance that the FDA would agree with the
Company's determinations and would not require a new 510(k) Submission for any
modifications made to the devices. If the FDA requires the Company to file a
new 510(k) Submission for any past or future modification to a cleared device,
the Company may be prohibited from marketing the device as modified until it
obtains clearance from the FDA. There can be no assurance that the Company will
obtain 510(k) clearance on a timely basis, if at all, for any device
modification for which it files a future 510(k) Submission. If 510(k) clearance
is granted, there can be no assurance that it will not contain significant
limitations in the form of warnings, precautions or contraindications with
respect to conditions of use.
The Company intends to develop new products for the future, including
new applications for the MediVIEW software system. The Company's new products,
including new applications for existing products, may qualify as devices that
require FDA clearance or approval prior to marketing . The FDA is currently in
the process of revising the regulatory requirements and review criteria for
software-related medical devices, which could adversely affect the Company's
introduction of new software products, or devices that incorporate software, in
the future. There can be no assurance that market clearance of future products
or product applications will be forthcoming in a timely manner, if at all, or
that FDA's clearance or approval of future products or product applications
will not contain significant limitations in the form of warnings, precautions
or contraindications with respect to conditions of use.
In October 1996, the Company learned of a defect in a software feature
of certain units of the 6060 Ambulatory Pump. The Company initiated a recall of
these units to correct the problem with an upgrade of the software. Pursuant to
FDA regulations, the Company notified the FDA of the recall and has updated the
FDA of the progress of the recall, which is now approximately 85% complete. The
FDA classified the Company's recall as a Class II recall, which is defined as a
situation in which the use of a violative product may cause temporary or
medically reversible adverse health consequences or where the probability of
serious adverse health consequences is remote. FDA reported this recall in the
January 15, 1997 issue of the FDA Enforcement Report. There can be no assurance
that FDA will not take further enforcement action against the Company with
respect to this matter.
Any products manufactured or distributed by the Company pursuant to
FDA clearances or approvals are subject to pervasive and continuing regulation
by the FDA. Device manufacturers are required to register their establishments
and list their devices with the FDA, and are subject to periodic inspections by
the FDA and certain state agencies. The FFDCA requires devices to be
manufactured in accordance with GMP requirements, which impose certain process,
procedure and documentation requirements upon the Company with respect to
product development, manufacturing and quality assurance activities. FDA
recently revised its GMP requirements. The new GMP requirements, which are
outlined under the FDA's Quality Systems regulations, are more extensive than
previous requirements. There can be no assurance that the Company will be able
to attain or maintain compliance with GMP requirements.
In addition, the Medical Device Reporting ("MDR") regulation obligates
the Company to inform the FDA whenever there is reasonable evidence to suggest
that one of its devices may have caused or contributed to death or serious
injury, or where one of its devices malfunctions and, if the malfunction were
to recur, the device would be likely to cause or contribute to a death or
serious injury. There can be no assurance that the FDA would agree with the
Company's determinations as to whether particular incidents meet the threshold
for MDR reporting.
-9-
<PAGE> 12
Labeling and promotion activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA
actively enforces regulations prohibiting marketing of products for unapproved
or uncleared uses.
If, as a result of FDA inspections, MDR reports or information derived
from any other source, the FDA believes the Company is not in compliance with
the law or regulations thereunder, the FDA can refuse to clear pending 510(k)
Submissions; withdraw previously cleared 510(k) Submissions; require
notification to users regarding newly found unreasonable risks; request repair,
refund or replacement of faulty devices; request corrective advertisements,
formal recalls or temporary marketing suspension; impose civil penalties; or
institute legal proceedings to detain or seize products, enjoin future
violations, or seek criminal penalties against the Company, its officers or
employees. Civil penalties for FFDCA violations may be assessed by the FDA in
lieu of or in addition to instituting legal action. Civil penalties may range
up to $15,000 per violation for violations of the FFDCA, and a maximum of
$1,000,000 per proceeding. Civil penalties may not be imposed for GMP
violations, unless the violations involve a significant or knowing departure
from the requirements of the FFDCA or a risk to public health. The FDA provides
manufacturers with an opportunity to be heard prior to the assessment of civil
penalties. If civil penalties are assessed, judicial review is available.
The Company exports, or intends to export, its products to Europe,
Japan and other foreign countries. Exports of products that have market
clearance from the FDA in the United States do not require FDA authorization
for export. However, foreign countries often require, among other things, an
FDA Certificate to Foreign Government verifying that the product complies with
FFDCA requirements. To obtain a Certificate to Foreign Government, the device
manufacturer must certify to the FDA that the product has been granted
clearance or approval in the United States and that the manufacturer and the
exported products are in substantial compliance with the FFDCA and all
applicable or pertinent regulations. The FDA may refuse to issue a Certificate
to Foreign Government if significant outstanding GMP violations exist.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and
labeling requirements, and import restrictions on devices. In addition, each
country has its own tariff regulations, duties and tax requirements. The
Company plans to use its distributors to assist in obtaining any necessary
foreign governmental and regulatory approvals. The Company does not currently
have its products registered or approved in any countries requiring an
extensive registration or approval process and has, therefore, not sold any
products in such countries.
The Company has received Underwriters Laboratory, Inc. product
recognition under UL 544, Standard for Medical and Dental Equipment as well as
product recognition under Canadian National Standard C22.2 through cUL for both
the 3030 Stationary Pump and the 6060 Ambulatory Pump. To maintain "UL"
status, the Company is subject to quarterly inspections by Underwriters
Laboratory, Inc.
The Company and its products are also subject to a variety of state
and local laws and regulations in those states or localities where its products
are or will be marketed. Manufacturers are also subject to numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations.
The Company's Rocap division is currently registered with the FDA as a
drug manufacturer and repackager. Rocap intends to develop new products and to
make modifications to existing products. Such new or modified products may
require obtaining 510(k) clearance, new drug application approval, or other FDA
clearance. If it were determined that any such new or modified products
required prior FDA approval, the Company would be prohibited from marketing
such products until the necessary approvals were obtained. Such approvals could
prove costly and time consuming to obtain. In addition there can be no
assurance that the Company will obtain such clearances on a timely basis, if at
all, for any new product and/or modification to an existing product. If any
such clearance is
-10-
<PAGE> 13
granted, there can be no assurance that it will not contain significant
limitations in the form of warnings, precautions, or contraindications with
respect to conditions of the use.
EMPLOYEES
As of December 31, 1996, the Company employed 100 persons full-time,
including 48 in manufacturing and operations, 26 in sales and marketing, eight
in research and development, twelve in administration, and six in regulatory
affairs/quality assurance. The Company anticipates hiring additional personnel
following the completion of the Offering, primarily in the areas of sales and
marketing and operations. The Company's employees are not represented by a
union, and the Company considers its relationship with its employees to be
satisfactory.
The Company has entered into employee non-disclosure and
non-competition agreements with each of its full-time employees that (i)
prohibit disclosure of confidential information to anyone outside of the
Company both during and subsequent to employment, (ii) require disclosure to
the Company of ideas, discoveries or inventions relating to or resulting from
the employee's work for the Company and assignment to the Company of all
proprietary rights to such ideas, discoveries or inventions, and (iii) limit
competition with the Company's business by the employee for a maximum period of
one year following termination of their employment.
ITEM 2. PROPERTIES
The Company occupies approximately 38,000 square feet of development,
production, warehouse and administrative space in Niles, Illinois. The facility
lease runs through October 31, 1999. The current annual lease rate for this
space is approximately $217,000 and is subject to annual increases. Sabratek
believes that the leased space is adequate for its anticipated needs into the
foreseeable future.
The Company's Rocap division occupies approximately 7,900 square feet
of production, warehouse and administrative space at two facilities in Woburn,
Massachusetts. The lease terms end July 31, 2000 and August 1, 2000. The
current annual lease rate in aggregate is approximately $64,000. Sabratek
intends to continue to operate the Rocap division's current business from its
existing facilities but may need to lease additional space based upon the
planned expansion of the Rocap division business.
ITEM 3. LEGAL PROCEEDINGS
On February 5, 1997, SIMS Deltec filed the Complaint in the United
States District Court for the District of Minnesota alleging that Sabratek's
manufacture, use and/or sale of the MediVIEW software in conjunction with its
infusion pumps infringes on a patent entitled "Systems and Methods for
Communicating with Ambulatory Medical Devices Such as Drug Delivery Devices"
previously issued to SIMS Deltec. The Complaint seeks injunctive relief,
unspecified monetary damages and costs. The Company has not yet formally
responded to the Complaint but intends to vigorously defend against the
allegations contained in the Complaint. Protracted litigation or an adverse
outcome in this matter could have a material adverse impact on the Company's
business, financial condition or results of operations.
The Company is also a party to routine litigation in the ordinary
course of business, none of which, if determined adversely to the Company,
would individually or in the aggregate have a material adverse effect on the
Company.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company completed its initial public offering in June, 1996 at a
price per share of $10.00. Since June 21, 1996, the Company's Common Stock has
traded on the Nasdaq National Market under the symbol "SBTK". The following
table sets forth, for the periods indicated, the high and low reported sale
prices of shares of the Common Stock as reported on the Nasdaq National Market.
<TABLE>
HIGH LOW
---
<S> <C> <C>
1996
Second Quarter (from June 21, 1996) . . $12 $10
Third Quarter . . . . . . . . . . . . . . . $16 1/2 $7 3/4
Fourth Quarter . . . . . . . . . . . . . . $16 3/4 $13
1997
First Quarter (through March 27, 1997) . . $29 1/8 $15 1/4
</TABLE>
As of February 28, 1992 there were 214 holders of record of the
Company's Common Stock.
The Company has never paid a cash dividend and does not anticipate the
payment of cash dividends in the foreseeable future as earnings are expected to
be retained to finance the Company's growth. Declaration of dividends in the
future will remain within the discretion of the Company's Board of Directors,
which will review its dividend policy from time to time.
During the period covered by this report, the Company issued the
following Securities without registration under the Securities Act of 1933, as
amended (the "Act").
From June 27, 1996 through December 24, 1996, the Company issued
86,537 shares of Common Stock upon the exercise of warrants held by individuals
and entities who had purchased shares of the Company's previously outstanding
preferred stock. The Company received proceeds of approximately $395,500 upon
the exercise of such warrants. All such issuances of Common Stock were exempt
from registration pursuant to Section 4(2) of the Act.
On September 6, 1996, the Company issued a warrant to purchase 50,000
shares of Common Stock at $13.00 per share to a customer. This warrant vested
immediately and is exercisable for a period of 5 years and includes piggyback
registration rights with a guarantee of one registration during the five year
term. This sale was exempt from registration in reliance on Section 4(2) of the
Act.
On April 18, 1996, the Company issued 23,637 shares of Common Stock to
Mirza Mehdi for aggregate consideration of $112,500 and 100,851 shares of
Common Stock to Arie Kalo for aggregate consideration of $480,000 in exchange
for consulting services performed by such individuals during 1995. The sales
were exempted from registration in reliance on Section 4(2) of the Act.
On March 14, 1996, the Company issued a Convertible Subordinated
Debenture to Charles K. Stewart Investments, in the amount of $844,500 for a
purchase price equal to the face amount thereof. The sale was exempt from
registration under the Act pursuant to Regulation D of the Act. The Company
also issued 167,245 shares of Common Stock for aggregate consideration of
$1,639,761 under the Act pursuant to Regulation D of the Act.
On February 13, 1996, the Company issued a Debenture to Hospital
Credit Corp. in the amount of $200,000 for a purchase price equal to the face
amount thereof. The sale was exempt from registration under the Act pursuant to
Regulation D of the Act.
On February 8, 1996, the Company issued a Debenture to ABDM Partners
c/o Daniel E. Straus in the amount of $50,000 for a purchase price equal to the
face amount thereof. The sale was exempt from registration under the Act
pursuant to Regulation D of the Act.
On February 6, 1996, the Company issued a Debenture to Stephen
Raphael, IRA in the amount of $50,000 for a purchase price equal to the face
amount thereof. The sale was exempt from registration under the Act pursuant to
Regulation D of the Act.
-12-
<PAGE> 15
On January 23, 1996, the Company issued a Debenture to Marvin Samson
in the amount of $100,000 for a purchase price equal to the face amount
thereof. The sale was exempt from registration under the Act pursuant to the
Regulation D of the Act.
On January 16, 1996, the Company issued a Debenture to Valerie Spencer
in the amount of $25,000 for a purchase price equal to the face amount thereof.
The sale was exempt from registration under the Act pursuant to Regulation D of
the Act.
On January 15, 1996, the Company issued Convertible Subordinated
Debentures to Mark Mitchell in the amount of $60,000 and The Hodes Family
Foundation in the amount of $50,000. Each debenture was issued for a purchase
price equal to the face amount thereof, and the sales were exempt from
registration under the Act pursuant to Regulation D of the Act.
On January 11, 1996, the Company issued a Debenture to IASD Health
Services Corp. in the amount of $100,000 for a purchase price equal to the face
amount thereof. The sale was exempt from registration under the Act pursuant to
Regulation D of the Act.
On January 8, 1996, the Company issued a Debenture to William Lautman,
a managing director of EGS Securities Corp., in the amount of $110,000 for
$50,000 in cash and $60,000 in payment for services rendered by Mr. Lautman to
the Company. The sale was exempt from registration under the Act pursuant to
Regulation D of the Act.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data with respect to the Company's statements
of operations for each of the years in the five year period ended December 31,
1996 and the balance sheet data as of December 31, 1996, 1995, 1994, 1993 and
1992 are derived from the Company's audited financial statements. The
financial data for the Company should be read in conjunction with the Company's
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
herein.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . $17,696 $ 4,040 $ 3,315 $ 1,229 $ 842
Cost of sales . . . . . . . . . 8,748 2,902 2,481 1,634 870
------- ------- ------- ------- -----
Gross margin (loss) . . . . . . 8,948 1,138 834 (405) (28)
Selling, general and
administrative
expenses . . . . . . . . . . 8,474 6,874 4,108 2,411 765
------- ------- ------- ------- -----
Operating income (loss) . . . . 474 (5,736) (3,274) (2,816) (793)
Interest expense . . . . . . . (319) (222) (260) (20) (11)
Other income (expense),
including interest income . . 615 (78) (21) 15 13
Stock appreciation rights(1) (1,628) -- -- -- --
------- ------- ------- ------- -----
Net loss . . . . . . . . . . . $ (858) $(6,036) $(3,555) $(2,821) $(791)
======= ======= ======= ======= =====
Weighted average common shares
outstanding(2) . . . . . . . 7,263 6,610
======= =======
Net loss per share (1995 pro
forma)(2) . . . . . . . . . . $ (0.12) $ (0.90)
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . $24,587 $ (1,101) $ 999 $ (1,296) $ (1)
Total assets . . . . . . . 32,951 4,179 3,338 2,215 1,547
Short-term debt (including
current portion of long
term obligations)(3) . . 303 775 91 2,013 381
Long-term obligations
(excluding current
portion)(3) . . . . . . . 24 2,512 464 310 --
Accumulated deficit . . . . (14,310) (13,452) (7,416) (3,861) (1,040)
Total stockholders' equity
(deficit) . . . . . . . . 28,650 (2,821) 1,151 (1,211) 390
- ----------
</TABLE>
(1) For the year ended December 31, 1996, a non-recurring charge in the
amount of approximately $1.6 million was recorded to recognize
obligations under certain stock appreciation rights in connection with
the Company's June 1996 initial public offering.
(2) See Note (2) to the Financial Statements for an explanation of the
calculation of weighted average shares outstanding.
(3) Includes capital lease obligations.
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1989, through 1991, the Company was in its
development stage and engaged primarily in research and development, product
engineering and activities related to obtaining clearance from the FDA for its
first product, the 3030 Stationary Pump. The Company has a limited operating
history and, although profitable for the last two calendar quarters, has
experienced significant operating losses since inception. Upon receiving FDA
clearance for the 3030 Stationary Pump in mid-1992, the Company focused its
efforts on creating a domestic and international sales and marketing network,
as well as a manufacturing capability, to assist in the distribution of its
first product to the alternate-site health care market. Concurrent with these
sales and marketing activities, the Company continued to fund the research,
development and regulatory clearance activities of other device and software
products.
The Company commercially launched the 6060 Ambulatory Pump and related
disposable supplies in late 1995 and its MediVIEW and PumpMaster in late 1996.
Since then, the Company has continued its sales and marketing activities
domestically and internationally for the distribution of its products and
continued to fund the research and development of additional products. In
addition, the Company derives revenues from the rental of its multi-therapy
infusion devices, servicing of products, and the sale of extended warranties.
The Company sells its products both directly to alternate-site and
acute-care providers, as well as to third-party distributors. The Company's
distributors and customers may purchase several months of inventory at any one
time which may cause fluctuations in quarterly revenues. Quarterly fluctuations
may also result from other factors. The Company also markets and sells its
products internationally and, as a result, its revenues may be affected by
fluctuations in exchange rates. Failure to obtain regulatory approval for the
distribution of new products domestically or in international markets, or
regulatory problems in general, may affect the revenues of the Company.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales increased to $17.7 million for the year ended
December 31, 1996 from $4.0 million for the year ended December 31, 1995, an
increase of $13.7 million or 343%. The increase is primarily attributable to an
increase in sales volume of the 3030 Stationary Pump, the 6060 Ambulatory Pump
and the respective disposables, to the alternate-site health care market. Also
contributing to the increase was the introduction of the MediVIEW and
PumpMaster products.
COST OF SALES. Cost of sales increased to $8.7 million for the year
ended December 31, 1996 from $2.9 million for the year ended December 31, 1995,
an increase of $5.8 million, or 200%. Approximately $5.3 million of the
increase represents the direct manufacturing cost attributable to the increase
in sales volume and the balance of the increase is attributable to the
investment in fixed manufacturing costs and overhead necessary to increase
production capacity.
GROSS MARGIN. Gross margin increased to $8.9 million for the year
ended December 31, 1996 from $1.1 million for the year ended December 31, 1995,
an increase of $7.8 million, or 709%. The increase is due primarily to the
increase in sales volume and the resulting economies of scale associated with
the increase. Gross margin as a percentage of sales increased to 50% for the
year ended December 31, 1996, from 28% for the year ended December 31, 1995.
The increase is due to the absorption of fixed manufacturing costs and overhead
over a greater unit volume, higher average pricing levels for the 3030
Stationary Pump, and the higher margins inherent to the 6060 Ambulatory Pump
introduced in the fourth quarter of 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $8.5 million for the year ended December
31, 1996 from $6.9 million for the year ended December 31, 1995, an increase of
$1.6 million, or 23%. Expansion of the Company's sales and clinical support
staff increased selling, general and administrative expenses by approximately
$1.8 million while reductions and elimination of financial, marketing and
product development consulting fees represent the offsetting amount. Selling,
general and administrative expenses as a percent of sales decreased to 48% for
the year ended December 31, 1996 from 173%
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<PAGE> 18
for the year ended December 31, 1995. The decrease is due to the allocation of
overhead expenses over a greater volume of sales.
OPERATING INCOME (LOSS). The Company reported operating income of
$474,000 for the year ended December 31, 1996 as compared to an operating loss
of $5.7 million for the year ended December 31, 1995. The primary contributors
to operating profitability, as discussed above, are the incremental sales
volume of the 3030 Stationary Pump and the 6060 Ambulatory Pump and related
products.
INTEREST EXPENSE. Interest expense increased to $319,000 for the year
ended December 31, 1996 from $222,000 for the year ended December 31, 1995, an
increase of $97,000, or 44%. The increase is attributable to the incremental
amount of debt issued by the Company and outstanding during the comparative
periods. Approximately $1.8 million, in aggregate, of debt was issued between
July and December, 1995 and was outstanding through the end of June, 1996.
INTEREST INCOME. Interest income increased to $617,000 for the year
ended December 31, 1996 from $13,000 for the year ended December 31, 1995. The
increase of $604,000 is due to the investment interest earned on proceeds from
the Company's initial public offering in June, 1996.
INCOME TAX PROVISION. Due to net losses for the years ended December
31, 1996 and 1995, the Company did not incur any federal or state income tax
liability for such periods. The Company currently has a net operating loss
carryforward in excess of $14.0 million; however, utilization of such
carryforward depends on future earnings and will be subject to annual
limitations as a result of changes that have occurred in the Company's
ownership.
NET LOSS. Net loss decreased to $858,000 for the year ended December
31, 1996 from $6.0 million for the year ended December 31, 1995, a decrease of
$5.1 million. The loss was reduced primarily as a result of increased sales
volume of new and existing products, as discussed above, and the allocation of
fixed manufacturing cost and overhead over a greater unit volume. The year
ended December 31, 1996 includes a non- recurring charge for stock appreciation
rights of approximately $1.6 million in connection with the Company's June,
1996 initial public offering, without which the Company would have reported net
income of $770,000.
YEARS ENDED DECEMBER 31, 1995 AND 1994
NET SALES. Net sales increased to $4.0 million for the year ended
December 31, 1995 from $3.3 million for the year ended December 31, 1994, an
increase of $725,000 or 22%. The market launch of the 6060 Ambulatory Pump and
related disposable tubing sets in the fourth quarter of 1995 accounted for
approximately $611,000 of the increase. The remaining amount was attributable
to further penetration of the alternate-site health care market through sales
of the 3030 Stationary Pump and related disposable tubing sets by regional
distributors, the implementation of a direct sales and marketing program in
non-distributor territories and the signing of additional national accounts.
COST OF SALES. Cost of sales increased to $2.9 million for the year
ended December 31, 1995 from $2.5 million for the year ended December 31, 1994,
an increase of $421,000, or 17%. Approximately $399,000 of the increase was
attributed to increased sales volume. The remainder was related to the
expansion of the Company's manufacturing capacities, including an increase in
operations headcount and facility. Cost of sales as a percentage of sales
decreased to 72% in 1995 from 75% in 1994 as a result of the change in product
mix, as well as efficiencies from volume purchases of supplies. However, the
overall decrease in cost of sales from these factors was partially offset by
the costs associated with increases in manufacturing capacities.
GROSS MARGIN. Gross margin increased to $1.1 million for the year
ended December 31, 1995 from $834,000 for the year ended December 31, 1994, an
increase of $304,000, or 36%. This increase in gross margin was attributable to
the higher percentage of sales to national accounts during 1995 at pricing
levels which were typically higher than those of sales to the Company's
distributors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $6.9 million for the year ended December
31, 1995 from $4.1 million for the year ended December 31, 1994, an increase of
$2.8 million, or 68%. Selling, general and administrative expenses accounted
for 170% of net sales in 1995 and 124% of net sales in 1994. The high level of
such expenses in both 1994 and 1995 is attributable to the Company's
development of its sales and marketing organization, expansion of its
administrative staff, and efforts to obtain FDA clearance for its products. The
increase in such expenses in 1995 from 1994 resulted primarily from an increase
in the number of direct sales personnel, increased expenditures relating to
development of the 6060
-16-
<PAGE> 19
Ambulatory Pump, MediVIEW and PumpMaster, the creation of a clinical support
department, and the further addition of administrative support staff.
Additionally, financial advisory fees of $410,000 were recorded in 1995.
OPERATING LOSS. Operating loss increased to $5.7 million for the year
ended December 31, 1995 from $3.3 million for the year ended December 31, 1994.
INTEREST EXPENSE. Interest expense decreased to $222,000 for the year
ended December 31, 1995 from $260,000 for the year ended December 31, 1994.
This decrease was primarily attributable to a reduction of average debt
outstanding during the year.
INCOME TAX PROVISION. The Company had net operating losses for the
years ended December 31, 1995 and 1994, and therefore did not incur any federal
or state income tax liability.
NET LOSS. As a result of the items discussed above, the Company's net
loss increased to $6.0 million for the year ended December 31, 1995 from $3.6
million for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
In June, 1996, the Company completed an initial public offering with
proceeds of $26.7 million, after underwriters' discounts and commissions. As of
December 31, 1996, cash balances were invested in U.S. Treasury Bills, U.S.
Treasury Notes, a short-term bond mutual fund, and a money market account.
As of December 31, 1996, the Company had approximately $16.8 million
in cash, cash equivalents, short-term and long-term investments in marketable
securities, and had net working capital of approximately $24.6 million.
Subsequent to December 31, 1996, the Company received a commitment for a credit
facility with up to $9.5 million of available borrowing. In March, 1997, the
Company filed a Registration Statement on Form S-1 with the intention of
selling 1,700,000 newly issued shares of Common Stock by the Company and
providing for the sale of approximately 500,000 shares of Common Stock by
existing stockholders, option holders and warrant holders.
The Company used cash in its operations of approximately $8.4 million
for the year ended December 31, 1996. Cash used in operations for the period
exceeds the Company's operating results for the same period due, primarily, to
the growth in trade accounts receivable and inventories as a result of actual
and anticipated growth in sales volume.
The Company believes that its financial assets will be sufficient to
fund its operations for the foreseeable future. Future liquidity and capital
resources could be adversely influenced by certain factors including the
Company's dependence on a relatively new customer base, regulatory or
legislative changes pertaining to health care, product liability exposure
regarding the delivery of medication, dependence on future product development,
and others. There can be no assurance that the Company will not require
additional financing and may, in the future, seek additional funds through bank
facilities, debt or equity offerings and to the extent such additional
financing is not available, the Company could suffer material adverse effects
to its financial condition and the results of its operations.
-17-
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sabratek Corporation:
We have audited the accompanying balance sheets of Sabratek
Corporation as of December 31, 1996 and 1995, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the
years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Sabratek
Corporation as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
March 4, 1997
-18-
<PAGE> 21
SABRATEK CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 10,446,818 $ 8,027
Short-term investments in marketable securities . 4,351,726 --
Receivables:
Trade, net of allowance for doubtful accounts of
$146,151 and $75,469 at December 31, 1996 and
December 31, 1995, respectively . . . . . . . 8,305,045 1,454,919
Other . . . . . . . . . . . . . . . . . . . . 124,690 --
------------ ------------
Total receivables . . . . . . . . . . . . 8,429,735 1,454,919
------------ ------------
Inventories . . . . . . . . . . . . . . . . . . . 5,049,001 1,825,411
Prepaids and other assets . . . . . . . . . . . . 586,338 50,737
------------ ------------
Total current assets . . . . . . . . . . . . . . . 28,863,618 3,339,094
------------ ------------
Property, plant and equipment, net . . . . . . . . 1,774,612 901,728
Intangible asset, net . . . . . . . . . . . . . . . 41,587 --
Note receivable . . . . . . . . . . . . . . . . . . 200,000 --
Long-term investments in marketable securities . . 2,011,560 --
Other . . . . . . . . . . . . . . . . . . . . . . . 59,495 50,828
------------ ------------
$ 32,950,872 $ 4,291,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term debt . . . . . . . . . . . . . . . . . $ 167,813 $ 621,021
Current portion of capital lease obligation . . . 132,459 150,848
Current portion of long-term debt . . . . . . . . 3,200 3,200
Accounts payable . . . . . . . . . . . . . . . . 2,247,312 2,377,159
Accrued expenses:
Payroll & commissions . . . . . . . . . . . . 1,264,857 191,086
Warranty . . . . . . . . . . . . . . . . . . . 235,740 229,263
Other . . . . . . . . . . . . . . . . . . . . 54,861 399,490
Deferred rent . . . . . . . . . . . . . . . . . . 30,599 31,322
Deferred revenue . . . . . . . . . . . . . . . . -- 125,000
Due to affiliated company . . . . . . . . . . . . 139,991 311,811
------------ ------------
Total current liabilities . . . . . . . . . . . . . 4,276,832 4,440,200
------------ ------------
Long-term capital lease obligation . . . . . . . . 23,111 149,334
Long-term debt . . . . . . . . . . . . . . . . . . 800 2,362,293
Accrued interest . . . . . . . . . . . . . . . . . -- 160,630
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . 4,300,743 7,112,457
------------ ------------
Stockholders' equity (deficit):
Convertible preferred stock par value $.01, issued
and outstanding -- 0 at December 31, 1996 and
1,768,129 at December 31, 1995 . . . . . . . . . . . -- 17,681
Common stock, par value $.01, issued and
outstanding -- 8,196,981 at December 31, 1996
and 1,718,458 at December 31, 1995 . . . . . 81,970 17,185
Additional paid-in capital . . . . . . . . . . . 42,891,350 10,708,671
Note receivable from stockholder . . . . . . . . -- (112,500)
Deferred compensation . . . . . . . . . . . . . . (17,371) --
Unrealized gains . . . . . . . . . . . . . . . . 4,140 --
Accumulated deficit . . . . . . . . . . . . . . . (14,309,960) (13,451,844)
----------- ------------
Total stockholders' equity (deficit) . . . . . . . 28,650,129 (2,820,807)
Commitments and contingencies . . . . . . . . . . . ============ ============
$ 32,950,872 $ 4,291,650
============ ============
</TABLE>
See accompanying notes to financial statements.
-19-
<PAGE> 22
SABRATEK CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . $17,696,786 $ 4,039,797 $ 3,314,599
Cost of sales . . . . . . . . . . . . . 8,748,364 2,901,818 2,480,369
----------- ----------- -----------
Gross margin . . . . . . . . . . . . . 8,948,422 1,137,979 834,230
Selling, general and administrative
expenses . . . . . . . . . . . . . . 8,474,408 6,873,934 4,107,588
----------- ----------- -----------
Operating income (loss) . . . . . . . . 474,014 (5,735,955) (3,273,358)
Other income (expenses):
Interest income . . . . . . . . . . . 617,157 12,607 19,340
Interest expense . . . . . . . . . . (318,557) (222,491) (260,494)
Stock appreciation rights . . . . . . (1,628,463) -- --
Other . . . . . . . . . . . . . . . . (2,267) (90,496) (40,311)
----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . $ (858,116) $(6,036,335) $(3,554,823)
=========== =========== ===========
Weighted average shares outstanding . . 7,263,114 6,609,571
=========== ===========
Net loss per share (1995 pro forma) . . $ (0.12) $ (0.90)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-20-
<PAGE> 23
SABRATEK CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON ADDITIONAL DEFERRED STOCKHOLDERS'
----------------- ---------------- PAID-IN NOTE COMPENSA- UNREALIZED ACCUMULATED EQUITY
DESCRIPTION SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE TION GAINS DEFICIT (DEFICIT)
----------- ------ ------ ------ ------ --------- ---------- -------- ---------- ----------- ----------
<S> <C> <C>
Balance at December 31, -- $ -- 1,510,395 $15,104 $ 2,746,663 $(112,500) $ -- $ -- $ (3,860,686) $(1,211,419)
1993
Conversion of short-term
convertible subordinated
debentures to convertible
preferred stock 635,815 6,358 -- -- 3,019,802 -- -- -- -- 3,026,160
Issuance of convertible
preferred stock, net of
$354,596 of offering
costs 681,900 6,819 -- -- 2,884,090 -- -- -- -- 2,890,909
Net loss -- -- -- -- -- -- -- -- (3,554,823) (3,554,823)
---------- -------- --------- ------- ----------- -------- -------- ------ ------------ -----------
Balance at December 31,
1994 1,317,715 13,177 1,510,395 15,104 8,650,555 (112,500) -- -- (7,415,509) 1,150,827
Issuance of convertible
preferred stock and
warrants, net of $76,758
of offering costs 202,963 2,030 -- -- 887,207 -- -- -- -- 889,237
Issuance of preferred
stock in exchange for
services rendered 728 7 -- -- 3,458 -- -- -- 3,465
Exercise of stock options -- -- 9,621 96 33,623 -- -- -- -- 33,719
Exercise of stock
warrants 246,723 2,467 198,442 1,985 1,054,928 -- -- -- -- 1,059,380
Issuance of common
stock warrants -- -- -- -- 78,900 -- -- -- -- 78,900
Net loss -- -- -- -- -- -- -- -- (6,036,335) (6,036,336)
---------- -------- --------- ------- ----------- ------- -------- ------ ------------ -----------
Balance at December 31,
1995 1,768,129 17,681 1,718,458 17,185 10,708,671 (112,500) -- -- (13,451,844) (2,820,807)
Issuance of common
shares, net of offering
costs of 1,562,932 -- -- 3,042,245 30,422 26,783,907 -- -- -- -- 26,814,329
Issuance of common
shares for services -- -- 124,488 1,245 591,255 -- -- -- -- 592,500
Conversion of long-term
debentures -- -- 1,331,162 13,312 3,992,662 -- -- -- -- 4,005,974
Conversion of preferred
stock (1,768,129) (17,681) 1,838,113 18,381 (700) -- -- -- -- --
Exercise of warrants and
options -- -- 142,515 1,425 668,702 -- -- -- -- 670,127
Settlement of note
receivable -- -- -- -- -- 112,500 -- -- -- 112,500
Issuance of warrant -- -- -- -- 127,000 -- -- -- -- 127,000
Deferred compensation,
net -- -- -- -- 19,853 -- (17,371) -- -- 2,482
Unrealized gains on
investments -- -- -- -- -- -- -- 4,140 -- 4,140
Net loss -- -- -- -- -- -- -- -- (858,116) (858,116)
---------- -------- --------- ------- ----------- ------- -------- ------ ------------ -----------
Balance at December 31,
1996 -- $ -- 8,196,981 $81,970 $42,891,350 $ -- $(17,371) $4,140 $(14,309,960) $28,650,129
========== ======== ========= ======= =========== ======= ======== ====== ============ ===========
</TABLE>
See accompanying notes to financial statements
-21-
<PAGE> 24
SABRATEK CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . $ (858,116) $(6,036,335) $(3,554,823)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . 402,953 185,562 89,483
Loss on sale of property, plant and
equipment . . . . . . . . . . . . . . . . . . -- -- 63,498
Deferred compensation . . . . . . . . . . . . . 2,482 -- --
Expenses paid with issuance of stock . . . . . 840,051 3,465 --
Expenses paid with issuance of warrants . . . . 127,000 35,700 --
Stock appreciation rights expense . . . . . . . 1,628,463 -- --
Provision for bad debts . . . . . . . . . . . . 70,682 75,469 --
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . (7,045,498) (350,659) (509,268)
Note receivable . . . . . . . . . . . . . . . (200,000) -- --
Deferred revenue . . . . . . . . . . . . . . (125,000) 125,000 --
Inventories . . . . . . . . . . . . . . . . . (3,223,590) (1,190,326) (90,479)
Advances to stockholders . . . . . . . . . . -- 162,306 (11,827)
Accounts payable . . . . . . . . . . . . . . (129,847) 1,522,960 147,883
Deferred rent . . . . . . . . . . . . . . . . (723) 19,254 3,535
Accrued expenses . . . . . . . . . . . . . . 848,119 621,860 139,010
Due to affiliated company . . . . . . . . . . (171,820) (95,863) 238,732
Other . . . . . . . . . . . . . . . . . . . . (544,268) 45,751 (124,196)
----------- ----------- -----------
Net cash used in operating activities . . . . . . . (8,379,112) (4,875,856) (3,608,452)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant
and equipment . . . . . . . . . . . . . . . . (1,275,221) (458,857) (249,824)
Purchase of intangible assets . . . . . . . . . (42,203) -- --
Proceeds from sale of property, plant and
equipment . . . . . . . . . . . . . . . . . -- -- 182,611
Purchases of marketable securities, net . . . . (6,359,146) -- --
----------- ----------- -----------
Net cash used in investing activities . . . . . . . (7,676,570) (458,857) (67,213)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of short-term debt . . . 167,813 621,021 860,000
Repayment of short-term debt . . . . . . . . . (621,021) -- (25,000)
Repayment of long-term debt . . . . . . . . . . (353,200) (3,200) (3,200)
Proceeds from issuance of long-term debt . . . 1,589,500 2,058,533 --
Payment of stock appreciation rights . . . . . (1,628,463) -- --
Payments of capital lease, net . . . . . . . . (144,612) (123,912) (45,880)
Proceeds from issuance of common stock,
net . . . . . . . . . . . . . . . . . . . . . 27,484,456 505,963 --
Proceeds from issuance of preferred stock,
net . . . . . . . . . . . . . . . . . . . . . -- 1,519,573 3,072,069
----------- ----------- -----------
Net cash provided by financing activities . . . . . 26,494,473 4,577,978 3,857,989
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . 10,438,791 (756,735) 182,324
Cash and cash equivalents at beginning of
year . . . . . . . . . . . . . . . . . . . . . 8,027 764,762 582,438
----------- ----------- -----------
Cash and cash equivalents at end of year . . . . . $10,446,818 $ 8,027 $ 764,762
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-22-
<PAGE> 25
SABRATEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Sabratek Corporation (the "Company") designs, manufactures and markets
programmable electronic intravenous infusion pumps, disposable intravenous
administration sets, integrated software, and related accessories. Sales of the
products are made through distributors as well as the Company's own
representatives.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
Revenues are recognized when products are shipped with allowances for
discounts and estimated returns recorded at the time of sale. Contract revenue
from research agreements is recorded when earned and as the related costs are
incurred. Payments received which are related to future performance are
deferred and recognized as revenue when earned over future performance periods.
(b) Cash and Cash Equivalents
Cash and cash equivalents represent funds in demand deposit accounts,
money market accounts and short-term bond mutual funds. Also included are U.S.
Treasury Bills and U.S. Treasury Notes to the extent they mature within 90
days.
(c) Short-term and Long-term Investment in Marketable Securities
Short-term and long-term investments in marketable securities are
classified as available-for-sale and are reported at fair market value.
Unrealized gains on available-for-sale securities are excluded from earnings
and are reported as a separate component of stockholders' equity until
realized.
(d) Inventories
Inventories are stated at the lower of cost or net realizable value.
Cost is determined under the first-in, first-out ("FIFO") method.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation and amortization is provided on a
straightline basis over the estimated useful lives. The estimated useful lives
of the machinery and equipment range from 3 to 5 years. The estimated useful
lives of office furniture, fixtures and equipment is 7 years. Leasehold
improvements are amortized over the life of the lease.
(f) Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $969,059, $2,193,508 and $1,098,167 in 1996, 1995
and 1994, respectively.
-23-
<PAGE> 26
(g) Patents
Patents costs in progress are amortized over 16 years. The Company has
assessed that no permanent impairment of the value of the asset has occurred.
Such assessment includes consideration of possible obsolescence, demand, new
technology, competition, and other pertinent economic factors and trends that
may have an impact on the value or remaining lives of the asset.
(h) Warranty
The provision for estimated warranty costs is recorded at the time of
sale and periodically adjusted to reflect actual experience.
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Computation of Net Loss Per Share
Net loss per share is based on the weighted average number of shares
outstanding with common equivalent shares from stock options and warrants
excluded because their effect is antidilutive. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, options and warrants, and
convertible debt granted or issued by the Company during the twelve month
period immediately preceding the initial public offering of the Company's
common stock have been included in the calculation of common shares as if they
had been outstanding for all periods presented. The net loss per share for the
year ended December 31, 1995 has been presented on a pro forma basis in lieu of
historical net loss per share as such historical information is not meaningful
due to the conversion of preferred stock and debt in connection with the
Company's initial public offering.
(l) Reclassifications
Certain amounts for the year ended December 31, 1995 were reclassified
to conform to the current year presentation.
(3) INVESTMENTS IN MARKETABLE SECURITIES
The following table summarizes short-term and long-term investments in
marketable securities as of December 31, 1996:
<TABLE>
<CAPTION>
LESS THAN 1-2
1 YEAR YEARS TOTAL
---------- ---------- ----------
<S> <C> <C>
U.S. Treasury
Bills . . . . . $1,344,386 $ -- $1,344,386
U.S. Treasury
Notes . . . . . 3,007,340 2,011,560 5,018,900
---------- ---------- ----------
$4,351,726 $2,011,560 $6,363,286
========== ========== ==========
</TABLE>
-24-
<PAGE> 27
The above securities are classified as available-for-sale and are
reported at fair market value. As of the balance sheet date, an unrealized gain
of $4,140 was recorded in the stockholders' equity section of the Balance
Sheet.
(4) INVENTORIES
Inventories at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Raw materials . . . . $3,401,848 $1,228,594
Work-in-process . . . 1,068,343 195,981
Finished goods . . . 578,810 400,836
---------- ----------
$5,049,001 $1,825,411
========== ==========
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Machinery and equipment . . . . . . . . $1,817,063 $ 725,694
Furniture and fixtures . . . . . . . . . 411,187 278,168
Leasehold improvements . . . . . . . . . 181,769 130,936
---------- ----------
2,410,019 1,134,798
Less accumulated depreciation . . . . . 635,407 233,070
---------- ----------
$1,774,612 $ 901,728
========== ==========
</TABLE>
Depreciation expense for years ended December 31, 1996, 1995 and 1994
amounted to $402,337, $184,383 and $86,639 respectively.
(6) NOTE RECEIVABLE
In December, 1996, the Company loaned $200,000 to a non-affiliated
corporation in exchange for a Non-Negotiable Promissory Note due upon demand
after February 18, 1999. The note carries an interest rate of 5.5% per annum,
payable upon maturity or prepayment of the note.
(7) AFFILIATED COMPANY
The Company is affiliated through common ownership with Dak-Tech Ltd.,
an Israeli company. Dak-Tech Ltd. provides the Company with manufacturing goods
and previously research and development activities. 67% of the Dak-Tech Ltd.
stock is owned by two stockholders of Sabratek. Amounts included as research
and development expense were $0, $44,585, and $271,166 for the years ended
December 31, 1996, 1995 and 1994, respectively. Amounts included as cost of
sales were $384,800, $493,959 and $748,652 for the years ended December 31,
1996, 1995 and 1994, respectively. As of December 31, 1996 and 1995, the
Company was indebted to Dak-Tech Ltd. for receipts of various inventory
components in the amount of $139,991 and $311,811, respectively.
(8) TRANSACTIONS WITH STOCKHOLDERS
During 1996, the Company forgave the repayment of a loan, interest on
the loan and certain advances to a stockholder who is an officer of the Company
totaling $336,939, in aggregate.
(9) CAPITAL STOCK
In March, 1996, the Company issued 167,245 shares of common stock at a
per share price of approximately $9.80, resulting in gross proceeds to the
Company of $1,639,761.
-25-
<PAGE> 28
In April, 1996, the Company executed a 1-for-3.173 reverse stock split
of its Common Stock and Series A convertible preferred stock. All references
in the financial statements to share and per share data retroactively reflect
the reverse stock split. Also in April, the Company filed a Restated
Certificate of Incorporation authorizing an increase in the number of
authorized shares of common stock to 25,000,000, $0.01 par value, and preferred
stock to 12,500,000, $0.01 par value.
In October, 1996, the Company filed a Certificate of Elimination to
rescind its Preferred Stock Certificate of Designation.
(10) INITIAL PUBLIC OFFERING
In June, 1996, the Company completed an underwritten initial public
offering (the "Offering") of 2,785,000 shares of common stock, par value $0.01,
at a price of $10.00 per share, with proceeds to the Company of $26,737,500
after underwriters' discounts and commissions. The Company's shares are traded
on the Nasdaq National Market under the symbol "SBTK."
(11) SHORT-TERM DEBT
During 1996, the Company executed a bank promissory note due August 5,
1997, in the amount of $167,813. Interest is paid monthly at a floating rate of
0.50% over the bank's prime rate and is secured by a domestically confirmed
letter of credit from a foreign customer of Sabratek.
During 1995, the Company entered into a General Loan and Security
Agreement with Sterling Business Credit (Sterling), pursuant to which, Sterling
held a first security interest in accounts receivable, as well as other assets
of the Company. As of December 31, 1995, the outstanding balance on the loan
was $621,021. During 1996, the Company paid back the loan in full and
terminated the General Loan and Security Agreement.
(12) LONG-TERM DEBT
In January, 1996, the Company issued 6 year convertible subordinated
debentures bearing interest at 13.22% per annum in the amount of $110,000,
convertible into one share of common stock for every $5.24 of principal and
accrued interest. The debentures were converted into 46,222 shares of common
stock, in the aggregate, upon the Offering, giving effect to the conversion
premium provided for in the debentures.
In January, 1996, the Company issued a convertible subordinated
debenture to a director of the Company in the amount of $100,000 at an interest
rate of 10%, until due at June 30, 1996. After June 30, 1996, the debenture
would have paid interest at 13.22% and been extended to 6 years, however, the
debenture was repaid in full, including interest, immediately following the
Offering, and prior to June 30, 1996.
In January and February, 1996, the Company issued convertible
subordinated debentures to directors and independent third-parties in the
principal amounts of $110,000 and $425,000, respectively. $60,000 of the
debentures were issued to a director in satisfaction of an obligation for
services rendered. In February, 1996, the debenture holders and the Company
agreed to convert the debenture into 112,407 shares of common stock, in the
aggregate, reflecting a conversion rate of $4.76.
In March, 1996, the Company issued a convertible subordinated
debenture to a stockholder in the principal amount of $844,500. The debenture
contained a 6 year maturity and an interest rate of 13.22% per annum and was
convertible into one share of common stock for every $5.24 of principal and
accrued interest. The debenture was converted into 354,869 shares of common
stock upon the Offering, giving effect to the conversion premium provided for
in the debenture.
In June, 1996, two convertible subordinated debentures, issued in
1993, in the principal amount of $300,000, in the aggregate, plus accrued
interest thereon, were converted into 63,031 shares of common stock, in the
aggregate,
-26-
<PAGE> 29
upon the Offering. The conversion rate included a conversion premium not
originally provided for in the debentures which resulted in a charge to
operating income of $46,841 in 1996.
In June, 1996, convertible subordinated debentures, issued in 1995, in
the aggregate principal amount of $1,808,292, were converted into 749,348
shares of common stock, in the aggregate, upon the Offering, giving effect to
the conversion premium provided for in the debentures.
(13) SERIES A CONVERTIBLE PREFERRED STOCK
Upon the closing of the Offering, all 1,768,129 shares of Series A
Preferred Stock were converted into 1,838,113 shares of the Company's Common
Stock, including anti-dilution adjustments.
(14) STOCK APPRECIATION RIGHTS
In July, 1996, the Company paid, in full, stock appreciation rights
totaling $1,628,463 in aggregate, which were issued pursuant to three separate
agreements during 1995. The agreements provided for a maximum appreciation of
$4.76 per share and required payment at the time of certain qualifying events,
or upon demand of the holder. The obligation created with respect to the
agreements resulted in a non-recurring charge to other income (expenses) in the
Statement of Operations for 1996.
(15) BUSINESS AND CREDIT CONCENTRATIONS
As of December 31, 1996 and 1995, individual customers representing at
least 10% of total receivables accounted for $3,458,882 or 41% (three
customers) and $848,588 or 53% (five customers) of accounts receivable,
respectively. Aggregate sales to customers representing at least 10% of total
sales individually amounts to $0, $1,367,227 (three customers) and $1,690,678
(four customers), for the years ended December 31, 1996, 1995 and 1994,
respectively. Individual customers representing over 10% of aggregate sales
each had sales of $0 for the year ended December 31, 1996; $475,591, $449,020
and $442,616 for the year ended December 31, 1995 and $517,204, $468,636,
$353,364 and $351,474 for the year ended December 31, 1994.
The Company's customers are based throughout the world with 9%, 15%,
14% of sales from international markets for the years ended December 31, 1996,
1995 and 1994, respectively. Customers are not concentrated in any specific
geographic location. The customer base is very specific, however, to the health
care industry as the Company's products are used primarily by hospitals and
alternate site healthcare settings such as nursing homes and clinics.
(16) RETIREMENT PLAN
The Company implemented a defined contribution plan during 1995
pursuant to section 401(k) of the Internal Revenue Code, whereby participants
may contribute a percentage of compensation, but not in excess of the maximum
allowed under the Code. The Plan includes a discretionary employer matching
contribution program as determined by the Board of Directors. In 1996 and 1995,
no matching contributions were made to Plan participants' accounts.
(17) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Cash paid during the year for interest . . . . . . . . . . $133,103 $87,473
</TABLE>
In 1996, 124,488 shares of common stock were issued in satisfaction of
accrued obligations in the amount of $592,500 for services rendered in 1995.
-27-
<PAGE> 30
In 1996, 1,331,451 shares of common stock were issued in exchange for
the retirement of $3,597,793 in long-term debt principal and $364,210 in
accrued interest on long-term debt. The number of shares issued included the
conversion premium originally provided for in the debt instruments.
Capital lease obligations of $0 and $178,239 were incurred in 1996 and
1995, respectively, when the Company entered into leases primarily for
machinery, equipment, furniture and fixtures.
In 1995, 728 shares of common stock were issued in exchange for
services rendered. The value of the services rendered equaled $3,465.
In 1994, 635,815 shares of Series A convertible preferred stock were
issued upon the conversion of $3,026,160 of short-term convertible subordinated
debentures, including accrued interest of $181,160.
(18) STOCK OPTIONS
The Company adopted the Amended and Restated 1993 Stock Option Plan
(the Stock Option Plan) which provided for the granting of stock options to
employees, nonemployee consultants, and directors of the Company. Options vest
over various periods as defined in the agreements and expire as determined by
the Board on an individual basis, but not to exceed 10 years. Total shares of
common stock reserved at December 31, 1996 for issuance on the exercise of
stock options was 1,773,668.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Stock Option Plan. Accordingly, no compensation cost has
been recorded. Had compensation cost for the Company's Stock Option Plan been
determined consistent with FASB Statement No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below.
The compensation cost of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Dividend yield . . . . . . . . . . 0% 0%
Volatility . . . . . . . . . . . . 67% 67%
Risk-free interest rate . . . . . . 7% 7%
Expected term in years . . . . . . . 4.2 4.2
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss As reported $ (858,116) $(6,036,335)
Pro forma $(2,025,953) $(6,522,389)
Net loss per
share As reported (1995 pro forma) $ (0.12) $ (0.90)
Pro forma $ (0.28) $ (0.99)
=========== ===========
</TABLE>
Pro forma net loss and loss per share reflect only options granted in
1996 and 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting period of up to 4 years and compensation cost for options
granted prior to January 1, 1995 is not considered.
A summary of the status of the Company's Stock Option Plan as of
December 31, 1994, 1995 and 1996 and changes during the years then ended is
presented below:
-28-
<PAGE> 31
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE PRICE
------ --------------
<S> <C> <C>
Outstanding at December 31, 1993 105,184 $.71
Granted . . . . . . . . . . . . . 53,577 5.43
Expired . . . . . . . . . . . . . (157) 11.11
--------
Outstanding at December 31, 1994 158,604 4.95
Granted . . . . . . . . . . . . . 613,773 4.76
Exercised . . . . . . . . . . . . (9,621) 3.51
Expired . . . . . . . . . . . . . (30,120 5.51
--------
Outstanding at December 31, 1995 732,636 4.78
Granted . . . . . . . . . . . . . 581,590 7.10
Exercised . . . . . . . . . . . . (55,978) 4.90
Expired . . . . . . . . . . . . . (2,994) 5.29
----------
Outstanding at December 31, 1996 1,255,254 $.85
==========
</TABLE>
The following table summarizes information about stock options outstanding as
of December 31, 1996:
<TABLE>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
WEIGHTED-AVG.
REMAINING WEIGHTED-AVG. WEIGHTED-AVG.
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------- ------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
$3.17 to 4.76 . . . . . . 1,021,363 7.4 $.73 375,986 $.68
$8.38 to 9.80 . . . . . . 159,224 9.4 9.31 20,986 8.87
$11.11 to 15.25 . . . . . 74,667 9.2 13.75 8,619 11.60
--------- -------
$3.17 to 15.25 . . . . . 1,255,254 7.8 5.85 405,591 5.04
========= =======
</TABLE>
(19) WARRANTS
The following table of warrants gives effect to the anti-dilution
adjustment on the conversion of preferred stock warrants to common stock
warrants. The anti-dilution adjustment resulted in 19,849 additional shares of
common stock issuable upon the exercise of certain warrants and changed the
exercise price from $4.76 to $4.55.
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------
NUMBER AVERAGE NUMBER AVERAGE
OF SHARES PRICE OF SHARES PRICE
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
December 31, 1993 . . 84,462 4.76 33,798 5.17
Issued . . . . . . 593,760 4.76 945 4.76
------- ------
December 31, 1994 . . 678,222 4.76 34,743 5.16
Anti-dilution
adjustment . . . . 19,849 4.76
Issued . . . . . . 316,397 4.76
Exercised . . . . . (246,723) 2.38 (198,442) 2.38
-------- --------
December 31, 1995 . . 451,348 4.55 152,698 4.71
Converted to Common (451,348) 4.55 451,348 4.55
Issued . . . . . . -- 50,000 13.00
Exercised . . . . . -- (86,537) 4.57
-------- --------
December 31, 1996 -- 567,509 5.33
========= =========
</TABLE>
(20) INCOME TAXES
A deferred tax asset stemming from the Company's net operating loss
carryforward, research and development credit carryforward, and other accruals
has been reduced by a valuation account to zero due to uncertainties regarding
the utilization of the deferred assets. The deferred tax asset and the
corresponding valuation allowance were approximately $5,851,000 and $5,201,542
as of December 31, 1996 and 1995, respectively.
The sale of the Company's common stock will result in an ownership
change for the Company, as defined for tax purposes. As a result an annual
limitation will be placed on the utilization of the existing net operating loss
carryforwards and credit carryforwards. This limitation may cause a portion of
the existing net operating loss and credit carryforwards to expire prior to
utilization.
-29-
<PAGE> 32
The net operating loss and research and development credit carryforwards
will expire as follows:
<TABLE>
<CAPTION>
NET RESEARCH
OPERATING AND
LOSS DEVELOPMENT
---------- -----------
<S> <C> <C>
2005 . . . . . . . . . . . . . . $ 42,000 $ --
2006 . . . . . . . . . . . . . . 128,000 --
2007 . . . . . . . . . . . . . . 794,000 2,000
2008 . . . . . . . . . . . . . . 2,500,000 47,000
2009 . . . . . . . . . . . . . . 3,341,000 53,000
2010 . . . . . . . . . . . . . . 5,880,000 63,000
2011 . . . . . . . . . . . . . . 1,335,000 27,000
----------- --------
Total . . . . . . . . . . . . . . $14,020,000 $192,000
=========== ========
</TABLE>
The net deferred tax assets are summarized at December 31 as follows:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards . . . . . . $ 374,032 $1,344,032 $2,640,340 $ 4,839,542 $ 5,443,000
Research and development credit
carryforwards . . . . . . . . . . . . . . -- -- 102,000 188,000 192,000
Other . . . . . . . . . . . . . . . . . . . -- -- -- 174,000 216,000
--------- ---------- ---------- ----------- -----------
374,032 1,344,032 2,742,340 5,201,542 5,851,000
Less: Valuation allowance . . . . . . . . . (374,032) (1,344,032) (2,742,340) (5,201,542) (5,851,000)
--------- ---------- ---------- ----------- -----------
Net deferred taxes . . . . . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
========= ========== ========== =========== ===========
</TABLE>
(21) LEASES
The following summarizes assets held under capital leases which are
included in property, plant, and equipment as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Machinery and equipment . . . . . . . . . . . . . . . . . . . . $239,839 $239,839
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . 181,750 181,750
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 48,386 48,386
-------- --------
469,975 469,975
Less accumulated depreciation . . . . . . . . . . . . . . . . . 232,871 94,316
-------- --------
$237,104 $375,659
======== ========
</TABLE>
The Company leases its facility under a noncancelable operating lease
arrangement. Rent expense charged to operations for the years ended December
31, 1996, 1995 and 1994 amounted to $221,035, $221,361 and $121,632,
respectively.
At December 31, 1996 minimum lease commitments together with the
present value of obligations under leases that have initial or remaining
noncancelable terms in excess of one year were as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
----------------------------------- -------- --------
<S> <C> <C>
1997 . . . . . . . . . . . . . $ 141,789 $230,949
1998 . . . . . . . . . . . . . 23,351 236,335
1999 . . . . . . . . . . . . . -- 200,764
2000 . . . . . . . . . . . . . -- --
2001 . . . . . . . . . . . . . -- --
--------- --------
Total minimum lease payments . . 165,140 $668,048
========
Less amount representing interest 9,570
---------
Present value of minimum lease
payments . . . . . . . . . . . . 155,570
Less current installments of
obligation . . . . . . . . . . . 132,459
---------
Obligation excluding current
installments . . . . . . . . . . $ 23,111
=========
</TABLE>
-30-
<PAGE> 33
(22) SUBSEQUENT EVENTS (UNAUDITED)
Acquisition
In February, 1997, the Company purchased substantially all of the
assets of Rocap, Inc., a Massachusetts company which produces various types of
pre-packaged syringes. Consideration paid by the Company is summarized as
follows:
(1) $100,000 cash.
(2) Forgiveness of $300,000 in debt, owed to the Company in the
form of a bridge loan agreement entered into on January
15, 1997.
(3) Assumption of approximately $661,000 in net liabilities.
(4) $2,900,000 in cash or stock of the Company.
The stock value as determined by the Asset Purchase Agreement for
payment in shares was $22.0375 per share and, as such, 131,593 shares are held
in escrow. The final number of Company shares deliverable to Rocap, Inc. will
be determined by the Company's stock price at July 1, 1997. The Company has the
option to pay in cash, rather than shares.
In February, 1997, the Company granted stock options to two former
Rocap, Inc. employees, one of which was elected an officer of the Company. In
aggregate, 220,000 option shares were granted at an exercise price of $22.25,
under the Company's Amended and Restated 1993 Stock Option Plan. The stock
options vest over a period of 3 to 4 years. Pursuant to the officer's
employment agreement, the Company could be obligated to purchase 100,000 option
shares at $18.00 each.
Litigation
On February 5, 1997, SIMS Deltec filed a complaint (the "Complaint")
in the United States District Court for the District of Minnesota alleging that
Sabratek's manufacture, use and/or sale of the MediVIEW software in conjunction
with its infusion pumps infringes on a patent entitled "Systems and Methods for
Communicating with Ambulatory Medical Devices Such as Drug Delivery Devices"
previously issued to SIMS Deltec. The Complaint seeks injunctive relief,
unspecified monetary damages and costs. The Company has not yet formally
responded to the Complaint but intends to vigorously defend against the
allegations contained in the Complaint. Although the outcome of these
proceedings cannot be determined, management believes that the outcome should
not have a material adverse effect on the Company's financial position.
Credit Facility
The Company received a commitment for a credit facility with up to
$9.5 million of available borrowings. Borrowings under this facility bear
interest at the bank's prime rate and the facility matures in April, 1999. No
amounts have been borrowed under this facility.
Public Offering
In March, 1997, the Company filed a Registration Statement on Form S-1
with the intention of selling 1,700,000 newly issued shares of Common Stock by
the Company and providing for the sale of approximately 500,000 shares of
Common Stock by existing stockholders, option holders and warrant holders.
-31-
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section of the Company's 1997 Proxy Statement entitled "Election
of Directors" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section of the 1997 Proxy Statement entitled "Executive
Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The section of the 1997 Proxy Statement entitled "Security Ownership
of Certain Beneficial Owners and Management" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section of the 1997 Proxy Statement entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference.
-32-
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) and (2). The Company's audited financial statements are
included herewith as Item 8 beginning on page 17.
(a)(3) and (c). The Company filed a Current Report on Form 8-k with
the Commission on March 11, 1997. Exhibits (numbered
in accordance with Item 601 of Regulation S-K).
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
+3.1 Amended and Restated Certificate of Incorporation
3.1.1 Certificate of Elimination regarding Series A
Convertible Preferred Stock
+10.1 Agreement with Americorp Financial, Inc. re: Leasing
Services, dated March 22, 1995
10.1.1 Amendment dated September 16, 1996, to Agreement with
Americorp Financial, Inc.
10.3 Intentionally Omitted
10.4 Intentionally Omitted
+10.5 Distributorship Agreement with CO-Medical, Inc., dated
February 17, 1992
+10.6 Distributorship Agreement with Clinical Technology
Inc., dated August 1, 1992
10.7 Intentionally Omitted
10.8 Intentionally Omitted
+10.9 Distributorship Agreement with Advanced Medical, Inc.,
dated September 1, 1991
+10.10 Distributorship Agreement with Healthcare Technology,
dated October 9, 1991
10.11 Intentionally Omitted
10.12 Intentionally Omitted
+10.14 Sales Agreement with Pharmacy Corporation of America,
dated March 17, 1995
+10.15 Sales & Marketing Agreement with Alpha Group, dated
November 6, 1995
</TABLE>
-33-
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
+10.16 Foreign Distributorship Agreement with MED-O-GEN INC.,
dated September 22, 1995
+10.17 Foreign Distributorship Agreement with Yoon Duk
Separation Technology, dated April 17, 1995
+10.18 Foreign Distributorship Agreement with Upwards
Biosystems Ltd., dated March 8, 1995
+10.19 Foreign Distributorship Agreement with Grupo Grifols,
S.A., dated September 17, 1993
+10.20 Foreign Distributorship Agreement with JMS Company,
dated March 22, 1996
+10.21 Foreign Distributorship Agreement with Brasimpex
+10.22 Foreign Distributorship Agreements with Medicare (s)
PTE LTD., dated February 10, 1995
10.23 Intentionally Omitted
10.24 Intentionally Omitted
+10.25 Master Lease Agreement with Comdisco, Inc., dated
August 9, 1994
+10.26 Stock Option Plan
+10.27 Lease for Real Property located at 5601 West Howard,
Niles, Illinois, dated as of May 31, 1994
10.27.1 Amendment, dated October 30, 1996, to Lease for Real
Property located at 5601 West Howard, Niles, Illinois
+10.29 Employment Agreement for Anil Rastogi
++10.30 Asset Purchase Agreement dated February 25, 1997, by
and among Sabratek Corporation, Rocap, Inc. and
Elliott Mandell
+++10.31 Employment Agreement for Stephen L. Holden
++10.32 Employment Agreement for Elliott Mandell
+++10.33 Lease Agreement for property located at 11 Sixth Road,
Woburn, Massachusetts, dated February 1, 1997
+++10.34 Lease Agreement for property located at 5 Constitution
Way, Woburn, Massachusetts, dated June 26, 1995
11.1 Computation of Per Share Earnings
</TABLE>
-34-
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
21.0 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
27.0 Financial Data Schedule
</TABLE>
- ----------------
* Incorporated by reference to the Company's Registration Statement on
Form S-1 declared effective by the Commission on June 21, 1996, file
No. 333-3866.
** Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on March 11, 1997.
*** Incoprorated by refernce to the Company's Registration Statement on
Form. S-1 filed with the Commission on March 17, 1997 File
No. 333-23437
(b) Financial Statement Schedules
-35-
<PAGE> 38
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) 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.
SABRATEK CORPORATION
By: /s/ K. Shan Padda
------------------------------------
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 1997.
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitute
and appoint K. Shan Padda and Stephen L. Holden their true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for them and in their name, place and stead,
in any and all capacities, to sign any and all amendments to this Annual Report
and to file the same, with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ K. Shan Padda Chairman of the Board and Chief Executive Officer
- ----------------------------------
K. Shan Padda
/s/ Anil Rastogi President and Chief Operating Officer
- ----------------------------------
Anil Rastogi
/s/ Doron C. Levitas Vice Chairman of the Board, Vice President--International
- ---------------------------------- Operations, Secretary and Director
Doron C. Levitas
/s/ Stephen L. Holden Senior Vice President and Chief Financial Officer,
- ---------------------------------- Principal Financial Officer
Stephen L. Holden
/s/ Scott Skooglund Vice President--Finance and Assistant Secretary,
- ---------------------------------- Principal Accounting Officer
Scott Skooglund
/s/ William D. Lautman Director
- ----------------------------------
William D. Lautman
/s/ L. Peter Smith Director
- ----------------------------------
L. Peter Smith
/s/ Scott Hodes Director
- ----------------------------------
Scott Hodes
/s/ Edson Spencer, Jr. Director
- ----------------------------------
Edson Spencer, Jr.
/s/ Marvin Samson Director
- ----------------------------------
Marvin Samson
/s/ William H. Lomicka
- ----------------------------------
William H. Lomicka Director
/s/ Mark Lampert
- ----------------------------------
Mark Lampert Director
</TABLE>
-36-
<PAGE> 1
EXHIBIT 3.1.1
CERTIFICATE OF ELIMINATION
OF
SABRATEK CORPORATION
Sabratek Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting duly called and held at which a quorum was
present on August 30, 1996, pursuant to Section 141(i) of the General
Corporation Law of the State of Delaware, the Board of Directors adopted
resolutions setting forth the proposed elimination of the Series A Convertible
Preferred Stock (the "Preferred Stock") as set forth herein:
WHEREAS, all of the shares of the
Corporation's Preferred Stock were converted into shares of Common
Stock upon the consummation of the Corporation's recently completed
initial public offering of the Common Stock; and
WHEREAS, no shares of the Preferred
Stock are outstanding and none will be issued pursuant to the
designations thereof set forth in the Certificate of Incorporation.
NOW, THEREFORE, BE IT RESOLVED, that
the proper officers of the Corporation are hereby authorized,
empowered and directed to execute and file a Certificate of
Elimination, which shall have the effect, when filed with the
Secretary of State in the State of Delaware, of eliminating from the
Certificate of Incorporated all references to the Preferred Stock; and
FURTHER RESOLVED, that the shares of
Preferred Stock shall not be retired but shall be returned to the
status of authorized but undesignated and unissued shares of Preferred
Stock.
SECOND: None of the authorized shares of the Preferred Stock are
outstanding and none will be issued.
THIRD: In accordance with the provisions of Section 151(g) of the
General Corporation Law of the State of Delaware, the Certificate of
Incorporation is hereby amended to eliminate therefrom all reference to, and
matters with respect to, the Preferred Stock, including but not limited to, the
Certificate of Designation, Preference and Rights of Series A Convertible
Preferred Stock of Sabratek Corporation filed with the State of Delaware on
September 21, 1994, which Certificate of Designation is hereby rescinded in its
entirety.
IN WITNESS WHEREOF, said SABRATEK CORPORATION, has caused this
certificate to be signed and attested by its duly authorized officers, this
30th day of September, 1996.
SABRATEK CORPORATION
By: /s/ K. Shan Padda
-------------------------------
Name: K. Shan Padda
Title: Chief Executive Officer
ATTEST:
/s/ Scott Skooglund
- ----------------------------
Name: Scott Skooglund
Title: Assistant Secretary
E-1
<PAGE> 1
EXHIBIT 10.1.1
AMENDMENT
THIS AMENDMENT, made this 16th day of September, 1996, by and among
SABRATEK CORPORATION, a Delaware corporation, with offices at 5601 West Howard
Street, Niles, Illinois, 60714 ("Sabratek") and AMERICORP FINANCIAL, INC., a
Michigan corporation, with offices at 20300 West Twelve Mile Road, Suite 202,
Southfield, Michigan 48076 ("AFI"),
WHEREAS, Sabratek and AFI entered into an agreement dated March 22,
1995 whereby Sabratek engaged AFI to provide leasing services to Sabratek's
equipment leasing customers (the "Agreement"); and
WHEREAS, the parties desire to amend certain terms of the Agreement.
NOW THEREFORE, in consideration of the mutual promises and the
covenants herein contained, the parties, intending to be legally bound, agree
to amend Paragraph 5 of the Agreement to read as follows:
5. Repurchase Obligation. A. The term "Customer" or "customer"
shall, for all purposes of this Agreement, include all customers of Sabratek or
any of its distributors and the obligations of Sabratek contained in this
Agreement, and expressly as contained in Paragraph 5 hereof, shall apply
whether AFI has purchased the Equipment from Sabratek or any distributor of
such Equipment.
B. In the event that any customer defaults on a lease agreement
between it and AFI, and such default continues for a period of one hundred
twenty (120) days, Sabratek shall either (i) purchase the subject lease and
equipment at the "Repurchase Price" (as defined below) or (ii) arrange for a
substitute lease agreement of comparable value which is reasonably acceptable
to AFI, Sabratek's purchase obligation as set forth above shall be satisfied
within ten (10) days of written notice of a Customer default from AFI to
Sabratek, which notice shall be deemed given five (5) business days following
the deposition by AFI of such notice in the United States Mail, postage
prepaid, certified mail, return receipt requested, or at Sabratek's option,
within sixty (60) days of such written notice, provided that Sabratek pays to
AFI all past due lease payments with respect to such defaulted lease within ten
(10) days of written notice of Customer default and pays to AFI all lease
payments with respect to such defaulted lease coming due within said sixty (60)
day period. The Repurchase Price shall be equal to the total remaining lease
payments due under the term of the lease agreement, discounted by the Rule of
78's, plus any related expenses which may be required by applicable law, on the
same basis as used by AFI's lender, together with the residual value of the
equipment as stated on AFI's books.
Sabratek's repurchase obligation hereunder is limited to the greater
of (a) Three Hundred Thousand ($300,000) or (b) twenty percent (20%) of the
outstanding balances (as determined and as provided in this Paragraph) of all
outstanding leases of AFI to Customers referred under this Agreement computed
from time to time as of the date of each of AFI's notices of default to
Sabratek. In any event, the computation of outstanding balances hereunder
shall not include, and Sabratek's repurchase obligation shall not apply to,
Customers who meet all of the following criteria when the lease agreement is
entered into:
(1) Minimum Positive Retained Earnings of at lease Five Million
Dollars ($5,000,000);
(2) Positive Net Income for Last Three Years; and
(3) Debt of Worth Ratio less than 5 to 1.
All other terms and conditions of the Agreement as previously executed
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WITNESS: SABRATEK CORPORATION
By: /s/ Scott Skooglund
- ------------------------- ------------------------
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<PAGE> 2
Its: Vice President Finance
AMERICORP FINANCIAL, INC.
_______________________________ By: /s/ Thomas X. Dunigan
---------------------
Its: President
This Outstanding Agreement is made part of the Agreement dated March 22, 1995
and amended September 16, 1996 by and between Sabratek Corporation as
"Sabratek" and Americorp Financial, Inc. as "AFI".
WHEREAS, Sabratek's repurchase obligation hereunder is limited to the greater
of: A. Three Hundred Thousand ($300,000.00); or B. twenty percent (20%) of the
outstanding balances of all outstanding leases to customers of Sabratek, and
WHEREAS, AFI agrees that as of September 16, 1996, Sabratek's outstanding
"leases" to customers of Sabratek shall be limited to the following
transactions:
<TABLE>
<CAPTION>
Repurchase
Original Remaining Original Value as of
Term Term Costs Sept. 16, 1996
-------- -------- ------- --------------
<S> <C> <C> <C> <C>
Evocare, Inc. 38 38 $104,000.00 $104,000.00
Homecare Management 36 5 9,313.00 1,746.00
Homecare Management 36 12 8,985.00 3,853.00
Long Island IV & Nutrition 36 11 5,408.00 2,270.00
S.N.I. Home Care 36 9 4,750.00 1,581.00
Discount Pharmacy 36 36 35,400.00 36,506.25
Fox Chase Center 30 6 27,000.00 4,752.84
Pharmacy Corp. of America 36 34 99,000.00 94,892.63
Infusion Therapy Supply 36 7 8,394.00 2,201.08
-----------
$251,802.80
-----------
</TABLE>
All other lease transactions funded by AFI prior to September 16, 1996 and not
listed above shall be excluded from the computation of the outstanding lease
balances and repurchase obligation.
This Outstanding Agreement shall only apply to transactions funded before
September 16, 1996 and at no time thereafter unless amended in writing and
signed by both parties.
Sabratek Corporation Americorp Financial, Inc.
By: /s/ Scott Skooglund By: /s/ Thomas X. Dunigan
--------------------- ---------------------
Its: Vice President Finance Its: President
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<PAGE> 1
EXHIBIT 10.27.1
LEASE AGREEMENT
Lease Agreement, dated as of October 30, 1996, between
AMERICAN NATIONAL BANK & TRUST COMPANY OF CHICAGO, TRUST NUMBER 40365, as
Landlord ("Landlord"), and SABRATEK CORPORATION, A DELAWARE CORPORATION, as
Tenant ("Tenant").
WHEREAS, Tenant and Landlord wish to amend that certain Lease
with Riders, dated May 31, 1994, as amended February 5, 1995, for the premises
("Premises") commonly known as 5601-11 and 5625 W. Howard St., Niles, IL 60714
(the "Lease").
NOW THEREFORE, the parties agree to increase the size of the
leased premises and amend the Lease as follows, effective November 15, 1996
1. SPACE. Tenant agrees to leave 5613 - 5 W. HOWARD ST., NILES, Illinois,
in addition to the existing space leased at 5601-11 & 5625 W. HOWARD
ST., NILES, Illinois. The total space leased will increase to 37,988
square feet with approximately 9,363 square feet of office space.
2. BASE RENTAL. BASE RENTAL SHALL BE INCREASED IN ACCORDANCE WITH THE
FOLLOWING SCHEDULE:
<TABLE>
<CAPTION>
PERIOD PERIOD BASE MONTHLY BASE
RENTAL RENTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
November 15, 1996 through October 31, 1997 $225,087.50 $18,007
- -------------------------------------------------------------------------------------------------
November 1, 1997 through October 31, 1998 $223,080 $18,590
- -------------------------------------------------------------------------------------------------
November 1, 1998 through October 31, 1999 $230,136 $19,178
</TABLE>
3. SECURITY DEPOSIT. The Tenant's Security Deposit as defined in 1.3
shall increase from $28,014 TO $36,370.
4. TENANT'S BASE TAXES. The Tenant's Base Taxes as defined in 3.1(b)
shall increase from $36,673.20 TO $45,585.60.
5. TENANT'S PRO RATA SHARE. The Tenant's Pro Rata Share as defined in
3.1(b)(i) shall increase from 46.94% TO 58.35%.
6. RENTABLE AREA OF THE PREMISES. The Rentable Area of the Premises as
defined in 3.1(b)(ii), shall increase from 30,561 square feet to
37,988 square feet.
7. LANDLORD'S IMPROVEMENTS. Landlord shall, at its solo cost and
expense, complete the following improvements:
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<PAGE> 2
a. Demolish and remove the counter and the a/v storage
room in warehouse area.
b. Cut opening and install double metal door between
warehouse and "blue room" office space.
c. Reopen masonry wall between 5611 and 5613 spaces,
in two places where it had previously been open, and
install doors.
8. BASE RENTAL ABATEMENT. Base Rental during the one month of December
1996 shall abate in the amount of $4,178.
Except as expressly amended hereby, the terms and conditions of the Lease shall
remain in full force and effect. To the extent the Lease is inconsistent with
the terms herein, the terms herein shall control.
LANDLORD:
ROSE REAL ESTATE SERVICES, INC.
Not personally, but as Agent for the beneficiaries of
AMERICAN NATIONAL BANK AND TRUST COMPANY
OF CHICAGO, TRUST NUMBER 40365
By: /s/ Leonard S. Rose
---------------
Print Name: Leonard H. Rose
Title: Chairman
TENANT:
SABRATEK CORPORATION, A DELAWARE CORPORATION
By: /s/ Scott Skooglund
---------------
Print Name: Scott Skooglund
Title: Vice President Finance
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<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF SHARE EARNINGS
<TABLE>
<CAPTION>
PRO FORMA
NET LOSS PER SHARE NET LOSS PER SHARE
------------------ ------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
<S> <C> <C>
Net Loss . . . . . . . . . . . . . . . $ (858,116) $(6,036,335)
Adjustment to interest expense
assuming conversion of debt at
beginning of period . . . . . . . . . - 113,867
----------- -----------
Adjusted net loss . . . . . . . . . . . $ (858,116) $(5,922,468)
=========== ===========
Weighted average shares used to
compute pro forma net loss per
share:
Weighted average common
shares outstanding . . . . . . . . 6,621,442 1,622,283
Weighted average preferred
shares outstanding -- assuming
conversion . . . . . . . . . . . . - 1,747,231
Weighted average convertible
subordinated debentures --
assuming conversion . . . . . . . . - 322,209
Additional shares pursuant to
SAB83 computation . . . . . . . . . 641,672 2,917,848
----------- -----------
7,263,114 6,609,571
=========== ===========
Net loss per share . . . . . . . . . . $ (0.12) $ (0.90)
=========== ===========
</TABLE>
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<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Sabratek Foreign Sales Corp., a corporation domiciled in the U.S. Virgin
Islands.
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<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS CONSENT
The Board of Directors
Sabratek Corporation:
We consent to incorporation by reference in the registration statement (No.
333-13315) on Form S-8 of Sabratek Corporation of our report dated March 4,
1997, relating to the balance sheets of Sabratek Corporation as of December 31,
1996, and 1995, and the related statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1996, and all related schedules, which report appears in the
December 31, 1996, annual report on Form 10-K of Sabratek Corporation.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 26, 1997
E-8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,446,818
<SECURITIES> 6,363,286
<RECEIVABLES> 8,451,196
<ALLOWANCES> 146,151
<INVENTORY> 5,049,001
<CURRENT-ASSETS> 28,863,618
<PP&E> 2,410,019
<DEPRECIATION> 635,407
<TOTAL-ASSETS> 32,950,872
<CURRENT-LIABILITIES> 4,276,832
<BONDS> 23,911
0
0
<COMMON> 81,970
<OTHER-SE> 28,568,159
<TOTAL-LIABILITY-AND-EQUITY> 32,950,872
<SALES> 17,621,786
<TOTAL-REVENUES> 17,696,786
<CGS> 8,666,847
<TOTAL-COSTS> 8,748,364
<OTHER-EXPENSES> 8,474,408
<LOSS-PROVISION> 70,682
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 474,014
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (858,116)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> 0
</TABLE>
