UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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For the fiscal year ended December 31, 1997 Commission File number 1-11831
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SABRATEK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3700639
(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)
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
(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 March 23, 1998 was approximately $289,040,098.50.
As of March 23, 1998, there were 10,482,206 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page 38.
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
1997 Form 10-K Annual Report
TABLE OF CONTENTS
Page
PART I
Item 1. Business............................................ 1
Item 2. Properties.......................................... 14
Item 3. Legal Proceedings................................... 14
Item 4. Submission of Matters to a Vote of
Security Holders................................. 14
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters...................... 15
Item 6. Selected Financial Data............................. 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 17
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...................................... 20
Item 8. Financial Statements and Supplementary Data......... 21
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure........... 38
PART III
Item 10. Directors and Executive Officers of the
Registrant....................................... 38
Item 11. Executive Compensation.............................. 38
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................ 38
Item 13. Certain Relationships and Related Transactions...... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................. 39
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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(R), MediVIEW(R), TCS Total Compliance System(TM), VHR
Virtual Hospital Room(TM) and Communicator(TM). The Company has also filed a
foreign trademark application for the name SABRATEK(TM) and its logo in Japan.
Unitron Medical Communications, Inc. has filed a trademark application for the
term MOON(TM).
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PART I
Item 1. Business
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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 devices and data
management 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.
The Company intends to expand its product line beyond infusion therapy
to become a leading developer and marketer of a variety of interactive
therapeutic and diagnostic medical systems for the delivery of high-quality,
cost-effective health care in alternate sites. The Company believes that its
current and future products and related software will facilitate the ability of
alternate-site providers to create a "virtual" hospital room, thereby affording
the delivery of a wide range of care previously provided primarily in an
acute-care setting. 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 MediVIEW, PumpMaster, prepackaged injectable prescription products
and pre-filled I.V. tubing flush syringes which further the Company's strategy
of creating a virtual hospital room.
Changing Health Care Environment
The increase in health care costs at a rate significantly higher than
that of overall inflation has caused managed care companies, indemnity insurers,
employers, governmental agencies and other payors to employ a variety of
strategies designed to contain health care expenditures. These cost-containment
strategies aim to reduce the cost of health care services, as well as the amount
of health care services utilized. In certain markets, payors are shifting away
from traditional fee-for-service based payment plans and moving towards managed
care plans in an effort to deliver quality health care services more
cost-effectively. In particular, cost-containment measures, including increased
utilization review and case management, have caused many health care providers
to move patients from the higher-cost hospital setting to lower-cost alternate
sites.
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. According to a report entitled "National Health Expenditure
Projections, 1994-2005" published in the summer of 1995 by Health Care Finance
Administration of the United States Department of Health and Human Services
("HCFA"), total expenditures for home health care, which constitutes a
significant component of alternate-site health care, increased from
approximately $11.1 billion in 1990 to approximately $24.2 billion in 1994 and
is projected to reach $45.9 billion in 2000. Since the early 1980s, the
provision of acute and chronic care for serious illnesses outside the hospital
has been recognized as a critical component of health care cost containment
because the delivery of certain therapies in an alternate-site setting is more
cost-effective than the delivery of these same therapies in an acute-care
hospital setting. 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
length 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
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acute 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. Growth in
alternate-site health care has also been facilitated by the increased acceptance
of such care by physicians, caregivers and patients. The American Medical
Association Council on Scientific Affairs and the American Medical Association
Council on Medical Education have recommended that training in the principles
and practice of home health care be incorporated into the undergraduate,
graduate and continuing education of physicians. Also contributing to the growth
of the alternate-site health care industry is the increase in the over-65
population, which has a higher incidence of illness and disability.
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. According to
POV, Incorporated, an industry tracking and consulting firm, the infusion
therapy segment of this market is expected to grow in revenues from $3.2 billion
in 1992 to $7.9 billion in 1997, representing an average annual compounded
growth rate of approximately 20%. 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 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 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. According to a 1992 study of the home
infusion therapy industry published by The National Alliance for Infusion
Therapy (the "NAIT Study"), nurses spent an average of 3.1 hours per home visit,
of which approximately 64 minutes, or 35%, was spent traveling to and from the
patient's home, 56 minutes, or 30%, was spent documenting clinical observations
as well as coordinating care and the balance was spent on tasks performed during
personal contact with the patient, including documentation. The NAIT Study also
shows that training is required for patients not only at the start of therapy
but also over time as the therapy of an individual patient changes. The NAIT
Study indicates that during such home visits, a significant amount of nursing
time is required to ensure that patients are complying with the prescribed
therapy. Compliance is important since it can prevent patients from having to
re-enter the costly hospital setting thereby generating unnecessary incremental
expenses and health risks as a result of failure to adhere to their prescribed
therapies, whether intentionally or unintentionally. 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 and
providers 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
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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.
The following table summarizes certain information with respect to the
Company's products:
<TABLE>
<CAPTION>
Product Description Status
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INFUSION PUMPS
<S> <C> <C>
3030 Stationary Pump Stationary, multi-therapy infusion Commercially available
device since 1992(1)(2)(3)
6060 Ambulatory Pump Ambulatory, multi-therapy infusion Commercially available
device since 1995(1)(2)(4)
INFUSION SUPPLIES
3030 Infusion Sets Non-proprietary, disposable tubing Commercially available
sets for use with 3030 Stationary since 1992
Pump
6060 Infusion Sets Proprietary, disposable tubing sets Commercially available
for use with 6060 Ambulatory Pump since 1995(1)(2)(3)
I.V. Admixture Prepackaged, injectable, Commercially available
Products prescription pharmaceuticals since 1995
Pre-filled Syringe Pre-filled I.V. tubing flush Commercially available
Products syringes since 1996(2)
INTERACTIVE PROGRAMMING AND MONITORING SOFTWARE
MediVIEW Proprietary, PC-based software that Commercially available
allows remote and real-time since 1996
programming, monitoring, data
capture and reporting
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AUTOMATIC DIAGNOSTIC TESTING DEVICE
PumpMaster Proprietary, portable, automatic Commercially available
diagnostic device for the testing since 1996(2)
of Sabratek infusion pumps
</TABLE>
(1) Patent(s) issued in the United States.
(2) United States and/or foreign patents pending.
(3) Foreign patent issued.
(4) U.S. patent 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 custom 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. The 3030 Stationary Pump has the ability to
work in conjunction with the MediVIEW software.
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 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.
Through the acquisition of Rocap, the Company offers I.V. Admixture and
pre-filled syringe products.
MediVIEW -- Remote programming, monitoring and data capture and
reporting 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 managed care providers. 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
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infusion devices. Pursuant to suggested standards adopted recently 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.
Strategic Partnerships
Unitron. In July, 1997, the Company entered into a licensing agreement
with Unitron Medical Communications, Inc. ("Unitron"), a privately held company
which has developed MOON, a proprietary clinical patient information management
network. Under the terms of this agreement, the Company will pay Unitron up to
$7 million for a 15-year technology license for use of the continuous, real-time
monitoring and reporting software which is a component of MOON. The Company also
entered into an option agreement with the Unitron shareholders which gives the
Company the right to purchase Unitron beginning in the fourth quarter of 1999.
If additional funding is required by Unitron previous to the option exercise,
the Company has the right of first refusal to provide such funding.
Unitron is in the process of deploying the MOON network on a national
basis. MOON provides for continuous, real-time monitoring and reporting of
clinical patient information from any site, including the patient's home.
Unlike in an acute care setting, patients in the alternate-site health
care environment are often not in close physical proximity to their health care
providers. As a result, patient information from the point of care is often
communicated to the health care provider in a less timely and complete manner.
In addition, physicians generally are less able to monitor the patient,
including compliance with prescribed therapy and the management of care
delivered by other providers. The goal of MOON is to enable health care
providers to more effectively treat higher acuity patients in an alternate-site
health care setting by maintaining the provider's ability to direct the
patient's care, monitor compliance with prescribed therapies and have access to
timely clinical information. MOON is designed to allow the provider to reduce
the need for on-site visits without compromising the quality of patient care.
MOON allows caregivers to input patient information into a data
repository which is immediately available to other providers, including
physicians. The Company anticipates that its interactive medical devices will,
in the future, transmit patient information directly to MOON without human
interaction. The immediate availability of patient information is a significant
improvement over the current paper-based reporting system which often lags two
or more weeks behind the initial collection of such information. MOON allows
providers immediate access to patient information. Additionally, the individual
health care provider tracking information is useful to payors and the
agencies/companies managing the provider. The Company intends to combine its
proprietary MediVIEW medical device management and telemedicine software with
Unitron's clinical patient information management network. The Company believes
that this combination is likely to accelerate the realization of the data
management aspects of the virtual hospital room.
GDS. In August, 1997, the Company entered into a supply and
distribution agreement with GDS Technology, Inc. ("GDS"), a privately held
medical device company. Under the terms of this agreement, the Company will pay
GDS $4 million for the 10-year exclusive rights to certain diagnostic products,
including the GDS Stat-Site point of care diagnostic testing device and related
disposable tests for use in the alternate site health care market. The Company
also entered into an option agreement with the GDS shareholders which gives the
Company
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the right to purchase GDS for a price of up to $25 million if exercised before
GDS' fiscal 1998 operating results are finalized, and for a price based upon
GDS' operating results, if exercised afterwards. Under certain circumstances the
GDS shareholders have the right, exercisable no earlier than the second quarter
of 1999, to require the Company to purchase their shares of GDS. GDS
manufactures bulk and specific enzymes and reagents for the diagnostic testing
industry, as well as Stat-Site, a unique test system for the point of care
market. GDS has 510(k) approval for its Stat-Site device and a limited number of
tests. The Stat-Site system provides immediate availability of certain critical
information which can be used for diagnosis or monitoring the efficacy of a
patient's drug therapy. For certain disease states, this information is
important to determine the regimen of care.
The Company intends to integrate the GDS Stat-Site system and the data
that it provides with its other medical devices as part of the virtual hospital
room in order to enhance its capabilities to serve the alternate-site health
care market.
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, pharmacy providers, 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, particularly for pain
management. Key decision makers include nursing, pharmacy, purchasing and
bio-medical departments, as well as physicians.
As of December 31, 1997, the Company's domestic sales force consisted
of 24 direct sales professionals, 9 clinical support staff members and 2
full-time sales consultants who work closely with 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 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 sell and 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
years ended December 31, 1997, 1996 and 1995, international sales accounted for
approximately 3%, 9% and 15%, respectively, 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. The
Company has received regulatory approval in Japan and currently markets there.
The Company will commence marketing its products in EEC 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.
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Research and Development
The Company is committed to continued product innovation and has
invested approximately $1.8 million, $1.0 million and $2.2 million in research
and development for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company's research and development effort is supported by a
staff of ten 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, and device communications and
integration. 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 mix
of in-house assembly and contract manufacturing is the most cost-effective means
of producing its products.
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, 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.
Sabratek's Rocap division manufactures prepackaged injectable
prescription pharmaceuticals and pre-filled I.V. tubing flush syringes at its
facilities in Woburn, Massachusetts and Orlando, Florida. Competitive back-up
sources exist for all of the components used in the production of Rocap's
products.
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
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department to ensure that the Company maintains its quality standards. Finally,
the Company maintains a post-sale performance monitoring program.
Sabratek provides its customers a standard one-year warranty on the
3030 Stationary Pump, the 6060 Ambulatory Pump and the PumpMaster. 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, five United States patents
have been issued, two United States patents have been allowed (are awaiting the
issuance of patent numbers by the Patent and Trademark Office) and one United
States patent is pending. One United States and one German patent have been
issued and one Japanese patent has been allowed for the 6060 Infusion Set and
United States and foreign patents are pending on this project. The Company also
has United States and Foreign patents pending for 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(R), MediVIEW(R), TCS Total Compliance System(TM), VHR
Virtual Hospital Room(TM) and Communicator(TM). The Company has also received a
foreign trademark registration for the name SABRATEK(R) and its logo in Japan.
Unitron Medical Communications, Inc. has filed a trademark application for the
term MOON(TM) which appears herein. Stat-Site(R), which appears herein, is a
registered trademark of GDS Technology, Inc.
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 marketing
infusion pump devices, including, but not limited to: Abbott Laboratories;
Alaris Medical, Inc.; Baxter International Inc.; I-Flow Corp.; McGaw, Inc., an
indirect subsidiary of B. Braun Melsungen AG; and SIMS Deltec, a unit of Smiths
Industries Medical Systems.
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 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 optimum 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.
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<PAGE>
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.
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.
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
-9-
<PAGE>
requirement for clinical testing of the device. It generally takes from four to
twelve months from submission 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 that fall into this category.
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.
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 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
past or future modifications made to a cleared device. If the FDA requires the
Company to file a new 510(k) Submission for any modification to the 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.
-10-
<PAGE>
The Company's Rocap division is registered with the FDA as a drug
manufacturer and repackager and as a device manufacturer, and its products are
required to be manufactured according to current GMPs and Quality System
Regulations ("QSRs") which impose certain process, procedure and documentation
requirements upon the Company with respect to design, manufacturing and quality
assurance activities. Some of the products manufactured by the Rocap division
have been listed with the FDA in accordance with the Drug Listing Act of 1972.
Some of the products manufactured by the Rocap division contain drugs that are
purchased from other manufacturers, which have received FDA approvals. There can
be no assurance that the suppliers of such drugs will be able to maintain such
approvals.
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. For example, 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 the 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. If in the
future the FDA concludes that current, modified or new products manufactured and
distributed by the Company require that the products be relabeled, require
510(k) clearance, require new drug approval, or other regulatory approval, the
FDA could prohibit the Company from manufacturing and/or distributing these
products until the Company made the necessary submissions and obtained any
required approvals. The FDA could also take regulatory action against the
Company for the manufacture and/or distribution of products.
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 97% 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. In April, 1997, the FDA
notified the Company of changes to its classification of certain drugs and
devices produced by the Company. In June, 1997, the FDA responded to the
Company's reply by noting that the Company has addressed the regulatory issues
raised in April. There can be no assurance, however, that the FDA will not again
reclassify products manufactured by the Company. There can be no assurance that
FDA will not take further action with respect to these matters.
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 QSRs. The Company believes that its manufacturing and quality
control procedures substantially conform to the requirements of the QSRs.
However, there can be no assurance that the FDA would concur with the Company's
determination in this regard or that the Company will be able to maintain
compliance with the QSRs.
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.
-11-
<PAGE>
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; require 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 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 has received approval to market its
products in Japan. Although the Company is in the process of having its products
approved in the European community, with the exception of Japan, it 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 and UL 2601,
General Requirements for Safety for Mechanical Electrical 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.
-12-
<PAGE>
Product Liability Insurance
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its products is alleged to have
resulted in adverse effects. The Company maintains product liability insurance
with coverage of $7.0 million per claim, with an annual aggregate policy limit
of $7.0 million. There can be no assurance that liability claims will not exceed
the coverage limits of such policies or that such insurance will continue to be
available on commercially acceptable terms, if at all.
Employees
As of December 31, 1997, the Company employed approximately 272 persons
full-time, including 195 in manufacturing and operations, 36 in sales, marketing
and clinical support, 13 in research and development, 15 in administration, and
13 in regulatory affairs/quality assurance.
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.
-13-
<PAGE>
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. The Company
may be required to lease additional space in the future and believes that such
space will be readily available at reasonable rates.
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. The Rocap division also
occupies approximately 14,400 square feet of production, warehouse and
administrative space at one facility in Orlando, Florida. The lease expires in
2007. The current annual base lease rate is approximately $104,400. 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 a 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 of
Communicating with Ambulatory Medical Devices Such as Drug Delivery Devices"
previously issued to SIMS Deltec. Subsequently, SIMS Deltec filed other
pleadings that raised additional claims against Sabratek and three of its
employees including trade secret misappropriation, unfair competition and
interference with SIMS Deltec's customers. SIMS Deltec seeks injunctive relief,
unspecified monetary damages and costs. In addition, SIMS Deltec filed for a
preliminary injunction against Sabratek seeking to prevent on a preliminary
basis Sabratek's manufacture and sale of the MediVIEW system. On August 4, 1997,
the District Court denied the motion for preliminary injunction. The Company and
the individual defendants intend to vigorously defend against the allegations
made by SIMS Deltec. Protracted litigation or an adverse outcome in this matter
could have a material adverse impact on the Company's business, financial
condition and results of operations.
In addition, Sabratek has filed a complaint against SIMS Deltec in the
United States District Court for the Northern District of Illinois alleging that
SIMS Deltec employees have made misstatements about Sabratek's products.
Sabratek has stated claims under the Federal Lanham Act to stop SIMS Deltec's
improper disparagement and has requested preliminary and permanent injunctive
relief, monetary damages and costs.
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.
-14-
<PAGE>
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.
High Low
---- ---
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 29-1/8 15-1/4
Second Quarter 31-3/8 17-3/4
Third Quarter 39-1/4 25
Fourth Quarter 38-11/16 23
1998
- ----
First Quarter (through March 10, 1998) 36 28
As of February 28, 1998 there were 168 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 December, 1997, the Company issued 99,798 shares of common stock
upon the exercise of warrants not covered by a registration statement. The
Company received proceeds of approximately $454,666 upon the exercise of such
warrants. All such issuances of common stock were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
-15-
<PAGE>
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, 1997
and the balance sheet data as of December 31, 1997, 1996, 1995, 1994 and 1993
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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales..................... $43,058 $17,696 $ 4,040 $ 3,315 $1,229
Cost of sales................. 18,720 8,748 2,902 2,481 1,634
------- ------- ------- ------- -----
Gross margin (loss)........... 24,338 8,948 1,138 834 (405)
Selling, general and administrative
expenses.................... 18,256 8,474 6,874 4,108 2,411
------- ------- ------- ------- -----
Operating income (loss)....... 6,082 474 (5,736) (3,274) (2,816)
Interest expense.............. (45) (319) (222) (260) (20)
Other income (expense), including
interest income............. 1,209 615 (78) (21) 15
Stock appreciation rights(1).. -- (1,628) -- -- --
------- ------- ------- ------- -----
Net income (loss)............. $ 7,246 $ (858) $(6,036) $(3,555) $(2,821)
======= ======= ======= ======== ========
Basic earnings (loss) per share $ 0.75 $ (0.17) $ (3.72) -- --
======== ======== ======== ========= ========
Basic weighted average shares
outstanding................... 9,614 5,143 1,622 -- --
======= ======== ======== ========== ========
Diluted earnings (loss) per share $ 0.67 $ (0.17) $ (3.72) -- --
======== ========== ========= ========== ========
Diluted weighted average shares
outstanding................... 10,895 5,143 1,622 -- --
======= ======= ======= ========== ========
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Balance Sheet Data:
Working capital............... 48,156 $24,587 $ (1,101) $ 999 $ (1,296)
Total assets.................. 71,167 32,951 4,1797 3,338 2,215
Short-term debt (including current
portion of long term
obligations)(3)............. 25 303 755 91 2,013
Long-term obligations (excluding
current portion)(3)......... 264 24 2,512 464 310
Accumulated deficit........... (7,064) (14,310) (13,452) (7,416) (3,861)
Total stockholders' equity
(deficit)................... 64,415 28,650 (2,821) 1,151 (1,211)
</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.
-16-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- RESULTS OF OPERATIONS
-----------------------------------------------------------------
Overview
The Company's founding vision and strategic focus is the creation of a
virtual hospital room for the alternate-site health care market. From its
inception in 1989 through mid-1992, 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 six years of operating history and,
although profitable since the third quarter of 1996, experienced significant
operating losses from its inception through mid-1996. 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 both MediVIEW and the PumpMaster(R) 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. On
February 25, 1997, the Company acquired substantially all the assets of Rocap
which produces and markets pre-packaged injectable prescription pharmaceuticals
and pre-filled flush syringes. In addition, the Company derives revenues from
the servicing of products and sale of accessories and 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. 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 adverse regulatory changes, may also affect the revenues of the
Company.
The Company has entered into strategic partnerships, including Unitron
and GDS, which provide components of the virtual hospital room. Management
intends to pursue additional acquisition and partnering opportunities in order
to further accelerate the development of the virtual hospital room.
Results of Operations
Years Ended December 31, 1997 and 1996
Net Sales. Net sales increased $25.4 million to $43.1 million for the
year ended December 31, 1997 as compared to $17.7 million for the year ended
December 31, 1996, an increase of 143%. The increase is attributable to several
factors; incremental unit sales volume of the 3030 Stationary Pump and 6060
Ambulatory Pump and their respective disposables into the alternate-site health
care market including national homecare companies, an increase in the average
per unit selling price due to a higher ratio of direct sales versus dealer
sales, the addition of the Rocap product line of pre-filled flush syringes in
February, 1997, the addition of the MediVIEW and PumpMaster products, and the
addition of certain licensed products from GDS Technology, Inc.
Cost of Sales. Cost of sales increased $10.0 million to $18.7 million
for the year ended December 31, 1997, as compared to $8.7 million for the year
ended December 31, 1996, an increase of 114%. The increase is primarily
attributable to direct product costs associated with incremental unit sales
volume of the 3030 and 6060 infusion pumps and related disposables, the addition
of the Rocap product line and an increase in costs relating to the expansion of
production capacity.
Gross Margin. Gross margin increased $15.4 million to $24.3 million for
the year ended December 31, 1997 as compared to $8.9 million for the year ended
December 31, 1996, an increase of 172%. The increase is due primarily to the
incremental unit sales volume and per unit contribution thereon, including the
economies of scale realized by allocating fixed manufacturing costs over a
greater number of units. Also contributing to the increase were higher average
pricing levels, a more favorable product mix of the 6060 Ambulatory Pump units
to 3030
-17-
<PAGE>
Stationary Pump units, and the addition of the Rocap product line. Gross margin
as a percent of sales increased to 57% for the year ended December 31, 1997 as
compared to 51% for the year ended December 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.8 million to $18.3 million for the year
ended December 31, 1997 as compared to $8.5 million for the year ended December
31, 1996, an increase of 115%. The increase is due primarily to the expansion of
the Company's direct sales force and clinical support staff and the associated
travel thereby, as well as, greater aggregate commissions paid in conjunction
with higher net sales. Contributing also to the increase for the year ended
December 31, 1997 was the assumption of expenses relating to the Rocap product
line, the addition of administrative and management personnel, as well as the
expansion of the Niles, Illinois facility. Expenses relating to SIMS Deltec,
Inc. litigation were approximately $737,000 for the year ended December 31,
1997. Selling, general and administrative expenses as a percent of sales
decreased to 42% for the year ended December 31, 1997 as compared to 48% for the
year ended December 31, 1996.
Operating Income. Operating income increased to $6.1 million for the
year ended December 31, 1997 as compared to $474,000 for the year ended December
31, 1996, an increase of 1,183%. Operating income as a percent of sales
increased to 14% for the year ended December 31, 1997 as compared to 3% for the
year ended December 31, 1996. The increase in operating income is due primarily
to incremental gross margin generated by increased unit sales volume of new and
existing products, as described above.
Interest Income. Interest income increased to $1.2 million for the year
ended December 31, 1997 as compared to $617,000 for the year ended December 31,
1996, an increase of 101%. The increase is attributable to a higher average
balance of cash available for investment as compared to that of the year ended
December 31, 1996. The Company completed a secondary public offering in April,
1997 which resulted in net proceeds to the Company of approximately $21.6
million. In June, 1996, the Company completed an initial public offering which
resulted in net proceeds to the Company of approximately $26.7 million.
Interest Expense. Interest expense decreased to $45,000 for the year
ended December 31, 1997 as compared to $319,000 for the year ended December 31,
1996, a decrease of 86%. The decrease for the year ended December 31, 1997 is
primarily attributable to the conversion and elimination of all convertible debt
outstanding at the Company's initial public offering in June, 1996. Interest
expense for the year ended December 31, 1997 applies to capital lease
obligations and borrowings collateralized by a certain customer receivable.
Stock Appreciation Rights Expense. No stock appreciation rights expense
is recorded for the year ended December 31, 1997 as compared to $1.6 million for
the year ended December 31, 1996. The stock appreciation rights expense for the
year ended December 31, 1996 was non-recurring.
Provision for Income Taxes. Due to net operating loss carryforwards
sufficient enough to offset pretax income, the Company did not incur any federal
or state income tax liability for the year ended December 31, 1997. Due to net
losses for the year ended December 31, 1996, the Company did not incur any
federal or state income tax liability for the period. Utilization of remaining
net operating loss carryforwards 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 Income. Net income was $7.2 million for the year ended December 31,
1997 as compared to a net loss of $858,000 for the year ended December 31, 1996.
Net income for the year ended December 31, 1997 was achieved primarily as a
result of incremental gross margin generated by increased unit sales volume of
new and existing products, as discussed above. Also contributing to net income
for the year ended December 31, 1997 was the increase in interest income due to
the investment of excess cash. Additionally, the year ended December 31, 1996
included the non-recurring charge for stock appreciation rights of $1.6 million.
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 their respective disposables, to the alternate-site health care market. Also
contributing to the increase was the introduction of the MediVIEW and PumpMaster
products.
-18-
<PAGE>
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 51% 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% 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 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.
Liquidity and Capital Resources
In April, 1997, the Company completed a public offering resulting in
net proceeds of $21.6 million. As of December 31, 1997, cash balances were
invested in commercial paper, certificates of deposit, money market accounts and
U.S. Treasury Notes.
As of December 31, 1997, the Company had approximately $24.6 million in
cash, cash equivalents, and short-term investments in marketable securities, and
had net working capital of approximately $48.2 million. In March 1997, the
Company entered into a bank credit agreement which matures in April 1999, and
provides for up
-19-
<PAGE>
to $9.5 million of available borrowing at the bank's prime rate. As of December
31, 1997, no funds have been borrowed under the agreement.
The Company used cash in its operations of approximately $5.2 million
for the year ended December 31, 1997. Cash used in operations for the period was
due, primarily, to the growth in trade accounts receivable and inventories as a
result of actual and anticipated growth in sales volume.
During the third quarter of 1997, the Company entered into strategic
partnerships with Unitron and GDS. The agreements with Unitron and GDS could
require the Company to pay up to a total of $11.0 million in cash license fees,
in aggregate. In addition, should the Company decide to exercise its right to
acquire either Unitron or GDS, such acquisitions may require additional outlays
of cash.
In September, 1997, the Company initiated a hedging program through the
use of forward contracts to minimize foreign currency fluctuation exposure. As
of December 31, 1997, the remaining aggregate U.S. dollar amount of the forward
contracts was $2,603,412, and such contracts mature at various dates through
September, 1998.
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.
Recent Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The Company is required to adopt the new standard for periods ending
after fiscal 1997. This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The standard requires all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed in equal
prominence with the other financial statements. The standard is not expected to
have a material impact on the Company's current presentation of income.
In June, 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company is required to adopt this
new standard for periods ending after fiscal 1997. This statement establishes
standards for the way companies are to report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The Company is currently
evaluating the impact of this standard on its financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Not Applicable.
-20-
<PAGE>
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, 1997 and 1996, 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, 1997. 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
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
March 17, 1998
-21-
<PAGE>
SABRATEK CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $19,598,203 $10,446,818
Investments in marketable securities, short term 5,004,390 4,351,726
Receivables:
Trade, net of allowance for doubtful accounts of
$502,772 at December 31, 1997 and $146,151 at
December 31, 1996, respectively 15,293,268 8,305,045
Other 207,960 124,690
------- ---------------
Total receivables 15,501,228 8,429,735
---------- ---------------
Inventories 13,718,459 5,049,001
Prepaids 821,107 586,338
------- ---------------
Total current assets 54,643,387 28,863,618
---------- ---------------
Property, plant and equipment, net 3,546,286 1,774,612
Notes receivable 233,334 200,000
Goodwill, net 4,341,602 --
Intangibles, net 8,301,881 41,587
Investments in marketable securities -- 2,011,560
Other 100,444 59,495
------- ------
$71,166,934 $ 32,950,872
=========== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current portion of
capital lease obligations $ 24,628 $ 303,472
Accounts payable 3,718,042 2,247,312
Payroll and commissions 2,039,275 1,264,857
Warranty 303,655 235,740
Accrued expenses 299,979 54,861
Other 102,184 170,590
------- ---------------
Total current liabilities 6,487,763 4,276,832
--------- ---------------
Long term obligations 264,383 23,911
------- ---------------
Total liabilities 6,752,146 4,300,743
--------- ---------------
Stockholders' equity:
Common stock, par value $.01; 25,000000 authorized,
10,325,280 and 8,196,981 issued and outstanding at
December 31, 1997 and 1996, respectively 103,253 81,970
Additional paid-in capital 71,343,925 42,891,350
Deferred compensation (12,408) (17,371)
Unrealized gains 43,521 4,140
Accumulated deficit (7,063,503) (14,309,960)
----------- ---------------
Total stockholders' equity 64,414,788 28,650,129
---------- ---------------
Commitments and contingencies
$ 71,166,934 $ 32,950,872
============= ===============
</TABLE>
See accompanying notes to financial statements.
-22-
<PAGE>
SABRATEK CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales............................. $ 43,058,601 $ 17,696,786 $ 4,039,797
Cost of sales......................... 18,719,987 8,748,364 2,901,818
---------------- ----------------- ----------------
Gross margin.......................... 24,338,614 8,948,422 1,137,979
Selling, general and administrative expenses 18,256,249 8,474,408 6,873,934
--------------- ----------------- ----------------
Operating income (loss)............... 6,082,365 474,014 (5,735,955)
Other income (expenses):
Interest income..................... 1,240,766 617,157 12,607
Interest expense.................... (44,891) (318,557) (222,491)
Stock appreciation rights........... - (1,628,463) -
Other............................... (31,783) (2,267) (90,496)
---------------- ---------------- ---------------
Net income (loss)..................... $ 7,246,457 $ (858,116) $ (6,036,335)
================ ================ ===============
Basic income (loss) per share $ 0.75 $ (0.17) $ (3.72)
================ ================= =================
Basic weighted average shares outstanding 9,614,278 5,142,763 1,622,283
================ ================= ================
Diluted income (loss) per share...... $ 0.67 $ (0.17) $ (3.72)
================ ================= ================
Diluted weighted average shares outstanding. 10,894,615 5,142,763 1,622,283
============== ================= ================
</TABLE>
See accompanying notes to financial statements.
-23-
<PAGE>
<TABLE>
<CAPTION>
SABRATEK CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997, 1996 and 1995
Additional Deferred
Preferred Common paid-in Note compen- Unrealized
Description Shares Amount Shares Amount capital receivable sation gains
----------- ------ ------ ------ ------ ------- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994 1,317,715 $ 13,177 1,510,395 $ 15,104 $ 8,650,555 $(112,500) $ -- $ --
Issuance of convertible
preferred stock and
warrants, net of
$76,758 of offering
costs 202,963 2,030 -- -- 887,207 -- -- --
Issuance of preferred
stock in exchange for
services rendered 728 7 -- -- 3,458 -- -- --
Exercise of stock options -- -- 9,621 96 33,623 -- -- --
Exercise of stock
warrants 246,723 2,467 198,442 1,985 1,054,928 -- -- --
Issuance of common
stock warrants -- -- -- -- 78,900 -- -- --
Net loss -- -- -- -- -- -- -- --
--------- ------- --------- --------- --------- --------- --------- ---------
Balance at December
31, 1995 1,768,129 17,681 1,718,458 17,185 10,708,671 (112,500) -- --
Issuance of common
shares, net of offering
costs of 1,562,932 -- -- 3,042,245 30,422 26,783,907 -- -- --
Issuance of common
shares for services -- -- 124,488 1,245 591,255 -- -- --
Conversion of long-term
debentures -- -- 1,331,162 13,312 3,992,662 -- -- --
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 -- -- --
Settlement of note
receivable -- -- -- -- -- 112,500 -- --
Issuance of warrant -- -- -- -- 127,000 -- -- --
Deferred compensation,
net -- -- -- -- 19,853 -- (17,371) --
Unrealized gains on
investments -- -- -- -- -- -- -- 4,140
Net loss -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December
31, 1996 -- -- 8,196,981 81,970 42,891,350 -- (17,371) 4,140
Issuance of common
stock, Purchase of
Rocap -- -- 131,593 1,316 2,898,665 -- -- --
Issuance of common
stock, net of offering
costs (of $1,666,491) -- -- 1,291,486 12,915 21,567,342 -- -- --
Exercise of warrants and
options -- -- 703,889 7,039 3,957,448 -- -- --
Issue common stock,
Stock Purchase Plan -- -- 1,331 13 29,120 -- -- --
Deferred compensation,
stock options -- -- -- -- -- -- 4,963 --
Increase in unrealized
gains -- -- -- -- -- -- -- 39,381
Net income -- -- -- -- -- -- -- --
------- --------- ----------- -------- ------------ --------- --------- --------
Balance at December 31,
1997 -- -- 10,325,280 $103,253 $71,343,925 $ -- $(12,408) $43,521
======= ========= ========== ======== =========== ========= ========= =======
See accompanying notes to financial statements
-24-
<PAGE>
SABRATEK CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997, 1996 and 1995 (CON'T)
Total
stockholders'
Accumulated equity
Description deficit (deficit)
----------- ------- ---------
Balance at December
31, 1994 $(7,415,509) $ 1,150,827
Issuance of convertible
preferred stock and
warrants, net of
$76,758 of offering
costs -- 889,237
Issuance of preferred
stock in exchange for
services rendered -- 3,465
Exercise of stock options -- 33,719
Exercise of stock
warrants -- 1,059,380
Issuance of common
stock warrants -- 78,900
Net loss (6,036,335) (6,036,336)
---------- ----------
Balance at December
31, 1995 (13,451,844) (2,820,807)
Issuance of common
shares, net of offering
costs of 1,562,932 -- 26,814,329
Issuance of common
shares for services -- 592,500
Conversion of long-term
debentures -- 4,005,974
Conversion of preferred
stock -- --
Exercise of warrants and
options -- 670,127
Settlement of note
receivable -- 112,500
Issuance of warrant -- 127,000
Deferred compensation,
net -- 2,482
Unrealized gains on
investments -- 4,140
Net loss (858,116) (858,116)
-------- --------
Balance at December
31, 1996 (14,309,960) 28,650,129
Issuance of common
stock, Purchase of
Rocap -- 2,899,981
Issuance of common
stock, net of offering
costs (of $1,666,491) -- 21,580,257
Exercise of warrants and
options -- 3,964,487
Issue common stock,
Stock Purchase Plan -- 29,133
Deferred compensation,
stock options -- 4,963
Increase in unrealized
gains -- 39,381
Net income 7,246,457 7,246,457
---------- ------------
Balance at December 31,
1997 $(7,063,503) $64,414,788
============ ===========
</TABLE>
See accompanying notes to financial statements
-25-
<PAGE>
SABRATEK CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 7,246,457 $ (858,116) $ (6,036,335)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 1,174,186 402,953 185,562
Deferred compensation 4,963 2,482 --
Expenses paid with equity issuances -- 967,051 39,165
Stock appreciation rights expense -- 1,628,463 --
Provision for bad debts 296,621 70,682 75,469
Changes in assets and liabilities:
Receivables (6,836,950) (7,045,498) (350,659)
Inventories (8,656,281) (3,223,590) (1,190,326)
Prepaid and other (492,203) (544,268) 45,751
Accounts payable 812,180 (129,847) 1,522,960
Accrued liabilities 1,082,823 848,119 621,860
Other (68,406) (297,543) 48,391
Long term obligation 257,777 -- --
Advances to stockholders -- -- 162,306
------------- ------------- ------------
Net cash used in operating activities (5,178,833) (8,179,112) (4,875,856)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,077,603) (1,275,221) (458,857)
Issuance of notes receivable -- (200,000) --
Purchase of intangibles (8,447,648) (42,203) --
Purchase of marketable securities (3,924,994) (6,359,146) --
Sale and maturity of marketable securities 5,323,271 -- --
Purchase of Rocap, Inc. (1,620,536) -- --
------------- ------------- -----------
Net cash used in investing activities (10,747,510) (7,876,570) (458,857)
----------- ---------- --------
Cash flows from financing activities:
Proceeds from issuance of debt -- 1,757,313 2,679,554
Repayment of debt (371,013) (974,221) (3,200)
Payment of stock appreciation rights -- (1,628,463) --
Payments of capital leases, net (125,136) (144,612) (123,912)
Proceeds from exercise of stock options and warrants 3,964,487 -- --
Proceeds from issuances of common stock, net 21,609,390 27,484,456 505,963
Proceeds from issuance of preferred stock, net -- -- 1,519,573
---------------- ---------------- ----------------
Net cash provided by financing activities 25,077,728 26,494,473 4,577,978
---------------- ---------------- ----------------
Increase (decrease) in cash and cash equivalents 9,151,385 10,438,791 (756,735)
Cash and cash equivalents at beginning of year 10,446,818 8,027 764,762
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 19,598,203 $ 10,446,818 $ 8,027
================ ================ ================
</TABLE>
See accompanying notes to financial statements.
-26-
<PAGE>
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, as well as
pre-filled flush syringes, and IV Admixture out-sourcing services. Sales of the
products are made through distributors as well as the Company's own
representatives.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and cash equivalents represent funds in demand deposit accounts,
money market accounts, commercial paper, certificates of deposit, 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.
(b) Investments in Marketable Securities
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.
(c) Inventories
Inventories are stated at the lower of cost or net realizable value.
Cost is determined under the first-in, first-out ("FIFO") method.
(d) Long-lived Assets
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
straight-line 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.
Intangible assets consist of licenses and marketing rights and are
being amortized over the life of the respective agreements using the
straight-line method.
Goodwill represents the excess of purchase price over the estimated
fair value of net tangible assets acquired and is being amortized over 15 years
using the straight-line method.
Patent 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.
Long-lived assets are reviewed for impairment in value based upon
undiscounted future cash flows, and appropriate losses are recognized whenever
the carrying amount of an asset may not be recovered.
-27-
<PAGE>
(e) Warranty
Accruals for estimated warranty costs are recorded at the time of sale
and periodically adjusted to reflect actual experience.
(f) Revenue Recognition
Revenues are recognized when products are shipped with allowances for
discounts, estimated warranty costs 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.
(g) Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $1,812,576, $969,059 and $2,193,508 in 1997, 1996
and 1995, respectively.
(h) 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.
(i) 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.
(j) Computation of Net Income Per Share and Net Loss Per Share
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share (FASB 128). FASB 128 simplifies
the standards for computing earnings per share and replaces the presentation of
primary earnings per share with basic earnings per share. It also requires dual
presentation of basic and diluted earnings per share on the face of the
consolidated statement of operations for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
diluted EPS computation. The reconciliation between basic and diluted income
(loss) per share for the years ended December 31, 1997, 1996 and 1995 are as
follows:
-28-
<PAGE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------------------
Income (loss) Shares Per Share
--------------------------------------------------------------------------------------
Basic earnings per share
<S> <C> <C> <C>
Net income $7,246,457 9,614,278 $0.75
Effect of dilutive securities -- 1,280,337 --
--------------------------------------------------------------------------------------
Diluted income per share $7,246,457 10,894,615 $0.67
======================================================================================
1996
--------------------------------------------------------------------------------------
Income (loss) Shares Per Share
--------------------------------------------------------------------------------------
Basic (loss) per share
Net (loss) ($858,116) 5,142,736 ($0.17)
Effect of dilutive securities -- -- --
--------------------------------------------------------------------------------------
Diluted (loss) per share ($858,116) 5,142,736 ($0.17)
======================================================================================
1995
--------------------------------------------------------------------------------------
Income (loss) Shares Per share
--------------------------------------------------------------------------------------
Basic (loss) per share
Net (loss) ($6,036,335) 1,622,283 ($3.72)
Effect of dilutive securities -- -- --
--------------------------------------------------------------------------------------
Diluted (loss) per share ($6,036,335) 1,622,283 ($3.72)
======================================================================================
</TABLE>
Certain options and warrants outstanding were not included in the computation of
diluted income (loss)per share because they were antidilutive. These options and
warrants may have a dilutive effect in future years.
(k) Financial Instruments
The Company enters into forward currency exchange contracts
("Forwards") in the regular course of business to minimize its exposure against
raw material purchases denominated in a foreign currency. Forward exchange
contracts related to raw material and fixed asset purchases are recognized as
adjustments to the bases of the underlying assets. The Forwards are not used by
the Company for trading or speculative purposes. At December 31, 1997 the
Company had Forwards outstanding to purchase foreign currency at a contracted
amount of $2,603,412. The spot rate at December 31, 1997, would require the
Company to exchange $2,528,046 for such currency. The Company had no outstanding
Forwards as of December 31, 1996.
At December 31, 1997 and 1996 fair value of the Company's financial instruments
approximated their carrying value.
(l) Reclassifications
Certain prior year's amounts were reclassified to conform to the
current year presentation.
-29-
<PAGE>
(3) Investments in Marketable Securities
The following table summarizes short-term and long-term investments in
marketable securities as of December 31:
U.S. Treasury securities 1997 1996
---- ----
Maturing in less than one year $ 5,004,390 $ 4,351,726
Maturing in one to two years - 2,011,560
--------------- ----------
Total $ 5,004,390 $ 6,363,286
=============== ===========
Investments in marketable securities are comprised of U. S. Treasury Notes.
These securities are classified as available-for-sale and are reported at fair
market value. At December 31, 1997 and 1996, unrealized gains of $43,521 and
$4,140, respectively, were recorded in stockholders' equity.
(4) Inventories
Inventories at December 31 is as follows:
1997 1996
---- ----
Raw materials $ 7,391,756 $ 3,284,436
Work-in-process 2,497,298 1,151,668
Finished goods 3,829,405 612,897
----------- ----------
$ 13,718,459 $ 5,049,001
============= ============
(5) Property, Plant and Equipment
Property, plant and equipment at December 31 is as follows:
1997 1996
---- ----
Machinery and equipment $ 2,787,279 $ 1,817,063
Furniture and fixtures 1,341,200 411,187
Leasehold improvements 591,886 181,769
-------------- -------------
4,720,365 2,410,019
Less accumulated depreciation 1,174,079 635,407
------------- -------------
$ 3,546,286 $ 1,774,612
============ ============
Depreciation expense for years ended December 31, 1997, 1996 and 1995
amounted to $538,672, $402,337 and $184,383 respectively.
(6) Notes Receivable
As of December 31, 1997, the Company was owed $233,334 for rights to
certain products granted under a 2-year license agreement. Amounts due under the
license agreement must be satisfied in cash or execution of a promissory note
bearing interest at the prime lending rate no later than June 30, 2000.
In December, 1996, the Company loaned $200,000 to GDS Technology, Inc.
("GDS"), 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. The note and all accrued interest was
converted into
-30-
<PAGE>
a prepaid license and marketing right in August 1997, pursuant to the supply and
distribution agreement entered into with GDS.
(7) Goodwill
On February 25, 1997, the Company purchased substantially all of the
assets of Rocap, Inc., a Massachusetts corporation, which produces pre-packaged
injectable prescription pharmaceuticals and pre-filled flush syringes. The
Company issued 131,593 shares of common stock, cash and assumed liabilities for
a total purchase price of $5,452,939. The acquisition was accounted for as a
purchase and resulted in $4,589,762 of goodwill. Accumulated amortization was
$248,160 at December 31, 1997.
(8) Intangibles
In August 1997, the Company entered into a supply and distribution
agreement with GDS. Under the terms of the agreement, the Company will pay up to
$4,000,000 for the 10-year exclusive rights to certain products. The Company
also entered into an option agreement with GDS's stockholders which gives the
Company the right to purchase the outstanding common stock of GDS in the future.
Under certain circumstances, GDS's stockholders have the right, no earlier than
the second quarter of 1999, to induce the stock purchase option.
In July 1997, the Company entered into a license agreement with Unitron
Medical Communications, Inc., a Florida corporation, doing business as MOON
Communications ("MOON"). Under the terms of the agreement, the Company will pay
up to $7,000,000 for a 15-year technology license. The Company also entered into
an agreement with MOONs' stockholders which gives the Company the right to
purchase MOON beginning in the fourth quarter of 1999.
The following table summarizes intangibles at December 31,
1997 1996
---- ----
Prepaid licenses and marketing rights $ 8,633,951 $ -
Patent costs 55,284 41,587
------------- ------
Less accumulated amortization 387,354 -
------------- --------
$ 8,301,881 $ 41,587
============== ========
(9) Capital Stock Transactions
In April, 1997, the Company completed an underwritten public offering
of 1,291,486 primary shares of common stock and 176,574 shares of common stock
by and for the account of existing stockholders at a price to the public of
$18.00 per share. Net proceeds to the company were $21,580,257.
In June, 1996, the Company completed an underwritten initial public
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.
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.
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
-31-
<PAGE>
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.
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>
Outstanding at 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
-------- --------
Outstanding at 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
-------- -------
Outstanding at December 31, 1996 -- 567,509 5.33
Granted -- -- --
Exercised -- (205,315) 4.54
Expired -- (1,554) 4.55
--------
Outstanding at December 31, 1997 -- 360,640 5.79
======== =======
</TABLE>
(10) Stock Option Plan
The Company adopted the Amended and Restated 1993 Stock Option Plan
(the Stock Option Plan) which provided for the granting of stock options to
certain 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. At
December 31, 1997 3,800,000 shares of common stock were reserved for issuance on
the exercise of stock options.
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 income
(loss) and income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) As reported $ 7,246,457 $ (858,116) $ (6,036,335)
Pro forma $ (1,260,755) $ (2,025,953) $ (6,522,389)
Net income (loss)
per share diluted As reported $ 0.67 $ (0.17) $ (3.72)
Pro forma $ (0.13) $ (0.39) $ (4.02)
</TABLE>
Pro forma net income (loss) and income (loss) per share reflect only
options granted in 1997, 1996 and 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
-32-
<PAGE>
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.
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 1997, 1996 and 1995.
1997 1996 1995
---- ---- ----
Dividend yield 0% 0% 0%
Volatility 63% 67% 67%
Risk-free interest rate 6% 7% 7%
Expected term in years 5.7 4.2 4.2
A summary of the status of the Company's Stock Option Plan as of
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented below:
Weighted
Average
Exercise
Shares Price
------ -----
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 5.85
Granted 1,752,404 22.73
Exercised (498,574) 6.08
Expired (6,853) 11.01
----------
Outstanding at December 31, 1997 2,502,231 17.60
=========
The per share weighted average fair value of options granted was $14.00, $4.11
and $3.08 in 1997, 1996, and 1995, respectively.
The following table summarizes information about stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Weighted-avg.
remaining Weighted-avg. Weighted-avg.
Range of exercise Number contractual exercise Number Exercise
prices outstanding life price Exercisable price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$3.17 to 4.76 614,060 7.6 $4.74 193,712 $4.70
$8.38 to 15.25 136,067 8.6 9.52 62,784 9.27
$22.00 to 30.38 1,752,104 9.5 22.73 74,250 22.21
--------- ------
$3.17 to 30.38 2,502,231 9.0 17.60 330,746 9.50
========= =======
</TABLE>
-33-
<PAGE>
(11) 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 up to 15 percent 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 1997,
1996 and 1995, no matching contributions were made to Plan participants'
accounts.
The Company adopted the Sabratek Corporation Employee Stock Purchase
Plan during 1997 whereby employees, after 90 days of service, can contribute up
to 10% of compensation to the purchase of Sabratek stock. The stock is purchased
quarterly at a price equal to 85% of the lower of, the closing price on either
the first or the last trading day of the quarter. There have been 150,000 shares
designated for this plan and 1,331 shares have been issued as of December 31,
1997.
(12) 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.
(13) Income Taxes
There is no current or deferred tax expense for the years ended
December 31, 1997, 1996 and 1995. The Company utilized net operating loss
carryforwards in 1997 and was in a loss position in 1996 and 1995. The deferred
tax consequences of temporary differences in reporting items for financial
statement and income tax purposes are recognized, if appropriate. Realization of
the future tax benefits is dependent on many factors, including the Company's
ability to generate taxable income within the allowable net operating loss
carryforward period. Management has considered these factors in reaching its
conclusion as to the valuation allowance for financial reporting purposes. The
income tax effect of temporary differences comprising the deferred tax assets
and deferred tax liabilities at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 5,918,000 $ 5,443,000
Research and
development credit
carryforwards 230,000 192,000
Other 409,000 216,000
------------ -----------
6,557,000 5,851,000
Less: Valuation allowance (6,557,000) (5,851,000)
----------- -----------
Net deferred taxes $ - $ -
============ ============
</TABLE>
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 $6,557,000 and $5,851,000
at December 31, 1997 and 1996, respectively. The valuation allowance was
increased by $706,000 in 1997 and $649,458 in 1996.
-34-
<PAGE>
A reconciliation between the statutory federal income tax rate and the
effective tax expense for each of the three years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 2,536,260 $ (300,341) $ (2,052,354)
Stock option activity (3,749,512) (349,117) --
Increase in valuation allowance 706,000 649,458 2,459,202
State income taxes, net of federal benefit 507,252 -- --
Other -- -- (406,848)
----------- -------- ------------
Income tax expense $ -- $ -- $ --
=========== ======== ===========
</TABLE>
Previous sales of the Company's common stock have resulted in an
ownership change for the Company, as defined for tax purposes. As a result, an
annual limitation exists on the utilization of the 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.
The net operating loss and research and development credit
carryforwards will expire as follows:
Net Research
Operating and
Loss Development
---- -----------
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 1,365,000 23,000
2012 1,016,000 42,000
----------- --------
Total $15,066,000 $230,000
=========== ========
(14) Supplemental Disclosures of Cash Flow Information
1997 1996 1995
---- ---- ----
Cash paid during the year for interest $44,891 $133,103 $87,473
In conjunction with the Rocap asset purchase in February 1997, the
Company issued 131,593 shares of common stock with a market value of $2,899,981
and assumed liabilities of $1,120,396.
In August 1997, the Company utilized an outstanding note receivable
from GDS for $200,000 as part of its consideration paid for prepaid license
fees.
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.
-35-
<PAGE>
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 $11,547, $0, and $178,239 were incurred in
1997, 1996, and 1995, respectively when the Company entered into leases
primarily for machinery, equipment, furniture and fixtures.
(15) Related Parties
The Company is affiliated through common ownership with Dak-Tech Ltd.,
an Israeli company. Dak-Tech Ltd. provides the Company with manufacturing goods
and, in 1995, research and development activities. Two officers of Sabratek own
in aggregate 67% of the Dak-Tech Ltd. stock. The amount included as research and
development expense was $44,585 for the year ended December 31, 1995. Amounts
included as cost of sales were $521,248, $384,800 and $493,959 for the years
ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996, the Company was indebted to Dak-Tech Ltd. for receipts of various
inventory components in the amount of $26,701 and $139,991, respectively.
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.
(16) Business and Credit Concentrations
As of December 31, 1997 and 1996, individual customers representing at
least 10% of total receivables accounted for $4,272,876 or 28% (two customers)
and $3,458,882 or 41% (three customers) of total accounts receivable,
respectively. Aggregate sales to individual customers representing at least 10%
of total sales amounts to $20,018,557 (two customers), $0 and $1,367,227 (three
customers), for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's customers are based throughout the world with 3%, 9% and
15% of sales to international markets for the years ended December 31, 1997,
1996 and 1995, 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, home health care
companies, long-term care facilities and clinics.
(17) Commitments and Contingencies
In March 1997, the Company entered into a bank credit agreement which
matures in April, 1999, and provides for up to $9,500,000 of available borrowing
at the bank's prime rate. As of December 31, 1997, no funds have been borrowed
under the agreement.
The Company leases its facilities under noncancelable operating lease
arrangements. Rent expense charged to operations for the years ended December
31, 1997, 1996 and 1995 amounted to $404,703, $221,035 and $221,361,
respectively.
At December 31, 1997 minimum lease commitments together with the
present value of obligations under operating leases that have initial or
remaining noncancelable terms in excess of one year were as follows:
-36-
<PAGE>
Years ending
December 31,
1998 $ 387,030
1999 352,349
2000 124,462
2001 86,400
2002 86,400
--------------
Total minimum lease payments $ 1,036,641
==============
On February 5, 1997 SIMS Deltec filed a complaint in the United States
District Court for the District of Minnesota alleging that the Company's
manufacture, use and/or sale of the MediVIEW software in conjunction with its
infusion pumps infringes on a patent entitled "Systems and Methods of
Communication with Ambulatory Medical Devices Such as Drug Delivery Devices"
previously issued to SIMS Deltec. Subsequently, SIMS Deltec filed other
pleadings that raised additional claims against the Company and three of its
employees including trade secret misappropriation, unfair competition and
interference with SIMS Deltec's customers. SIMS Deltec seeks injunctive relief,
unspecified monetary damages and costs. In addition, SIMS Deltc filed for a
preliminary injunction against the Company seeking to prevent, on a preliminary
basis, the Company's manufacture and sale of the MediVIEW system. On August 4,
1997 the District Court denied the motion for preliminary injunction. The
Company and the individual defendants intend to vigorously defend against the
allegations made by SIMS Deltec. Protracted litigation or an adverse outcome in
this matter could have a material adverse impact on the Company's financial
position and results of operations. In the opinion of management, ultimate
resolution of this matter is not expected to have a material adverse impact on
the financial position or results of operations of the Company.
-37-
<PAGE>
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.
-38-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------------------------------------------------------------------------
(a) Exhibits
(a)(1)and (2). The Company's audited financial statements
are included herewith as Item 8 beginning on page 21.
(a)(3) and (c). The Company filed a Current Report on Form
8-K with the Commission on March 12, 1997.
Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
<TABLE>
<CAPTION>
Page Incorporation
Exhibit Number (if by Reference
Number Description of Documents applicable) (if applicable)
------ ------------------------ ----------- ---------------
<S> <C> <C> <C>
3.1 Articles of Incorporation +
3.2 ByLaws +
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.
10.2 Agreement with Clintec Nutrition Company re: Development +
Agreement, dated September 1, 1995
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
10.13 Pump Contract with Chartwell Home Therapies, dated +
November 22, 1993
10.14 Sales Agreement with Pharmacy Corporation of America, +
dated March 17, 1995
-39-
<PAGE>
10.15 Sales & Marketing Agreement with Alpha +
Group, dated November 6, 1995
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
10.28 Employment Agreement for K. Shan Padda +
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
10.35 Lease Agreement for property located at 1629 Prime Court, +++++
Suite 100, Orlando, Florida, dated March 11, 1997
11.1 Statement re: computation of per share earnings E-1
23 Consent of KPMG Peat Marwick, LLP E-2
27 Financial Data Schedule E-3
</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).
-40-
<PAGE>
++ Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on March 11, 1997.
+++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 filed with the Commission
on March 31, 1997.
++++ Incorporated by reference to the Company's Registration Statement on
Form S-1, declared effective by the Commission on April 4, 1997
(File No. 333-23437).
+++++ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 filed with the Commission on
May 15, 1997.
-41-
<PAGE>
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 Registration
Statement 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.
Signature Title
- --------- -----
/s/ K. Shan Padda
- -----------------
K. Shan Padda Chairman of the Board and Chief Executive Officer
/s/ Anil K. Rastogi
- -------------------
Anil K. Rastogi President and Chief Operating Officer
/s/ Doron C. Levitas
- --------------------
Doron C. Levitas Vice Chairman of the Board, Vice President--
International Operations, Secretary and Director
/s/ Stephen L. Holden
- ---------------------
Stephen L. Holden Senior Vice President, Chief Financial Officer and
Treasurer, Principal Financial Officer
/s/ Scott Skooglund
- -------------------
Scott Skooglund Vice President--Finance and Assistant Secretary,
Principal Accounting Officer
/s/ William D. Lautman
- ----------------------
William D. Lautman Director
/s/ L. Peter Smith
- ------------------
L. Peter Smith Director
/s/ Francis V. Cook, M.D.
- -------------------------
Francis V. Cook, M.D. Director
/s/ Edson W. Spencer, Jr.
- -------------------------
Edson W. Spencer, Jr. Director
-42-
<PAGE>
/s/ Marvin Samson
- -----------------
Marvin Samson Director
/s/ William H. Lomicka
- ----------------------
William H. Lomicka Director
/s/ Mark Lampert
- ----------------
Mark Lampert Director
-43-
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $7,246,457 ($858,116) ($6,036,335)
=============================================================================
Weighted average common shares
outstanding 9,614,278 5,142,736 1,622,283
-----------------------------------------------------------------------------
9,614,278 5,142,736 1,622,283
=============================================================================
Basic income (loss) per share $0.75 ($0.17) ($3.72)
=============================================================================
Dilutive effect of options and warrants
outstanding under treasury stock method 1,280,337 -- --
-----------------------------------------------------------------------------
10,894,615 5,142,736 1,622,283
=============================================================================
Diluted income (loss) per share $0.67 ($0.17) ($3.72)
=============================================================================
</TABLE>
E-1
The Board of Directors
Sabratek Corporation:
We consent to incorporation by reference in the registration statements Nos.
333-31891 on Form S-3 and 333-13315, 333-31495, and 333-31503 on Form S-8 of
Sabratek Corporation of our report dated March 17, 1998, relating to the balance
sheets of Sabratek Corporation as of December 31, 1997 and 1996, 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, 1997, which report
appears in the December 31, 1997 annual report on Form 10-K of Sabratek
Corporation.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 17, 1998
-E-2-
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