<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 1-11831
SABRATEK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
36-3700639
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
8111 NORTH ST. LOUIS AVENUE
SKOKIE, ILLINOIS 60076
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(847) 720-2400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") during the preceding 12 months (or for such shorter
period that the registrants were required to file such reports), and (2) have
been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
As of April 30, 1998, 9,894,263 shares of Sabratek Corporation's Common Stock
were outstanding.
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SABRATEK CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Page
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999 (Unaudited) and December 31, 1998................................................4
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998 (Unaudited)..........................................5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 (Unaudited)..........................................6
Notes to Consolidated Financial Statements (Unaudited)..........................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................11
PART II OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................12
Item 2. Changes in Securities..........................................................................12
Item 5. Other information..............................................................................13
Item 6. Exhibits and Reports on Form 8-K...............................................................13
</TABLE>
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FORWARD LOOKING STATEMENTS:
Except for the historical information contained in this Quarterly
Report on Form 10-Q, certain matters discussed herein, including (without
limitation), under Part I, Management's Discussion and Analysis of Financial
Condition and Results of Operations, under Part I, Quantitative and Qualitative
Disclosures About Market Risk and under Part II, Legal Proceedings, contain
forward-looking statements, as that term is defined in the Private Securities
Reform Act of 1995 about Sabratek. Further, this Report on Form 10-Q contains
certain forward-looking statements within the meaning of Section 21 E of the
Securities Exchange Act of 1934, as amended, about Sabratek. Although Sabratek
believes that, in making any such statements, its expectations are based on
reasonable assumptions, any such statement may be influenced by factors that
could cause actual outcomes and results to be materially different from those
projected. When used in this document, the words anticipates, believes, expects,
intends, plans and similar expressions as they relate to Sabratek or its
management are intended to identify such forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties and
speak only as of the date of this Report on Form 10-Q. Important facts that
could cause actual results to differ materially from those in forward-looking
statements, certain of which are beyond the control of Sabratek, include:
changes in the medical device and drug regulatory environment; delays or
difficulties in introducing new products; the success of Sabratek's research and
development; the impact of general economic conditions in the U.S. and in other
countries in which Sabratek currently does business; industry conditions,
including competition, product and raw material prices; fluctuations in exchange
rates and currency values; capital expenditure requirements; legislative or
regulatory requirements or approvals; interest rates; access to capital markets;
the timing of and value received in connection with asset or corporate
acquisitions; and obtaining required approvals, if any, of debt holders or
stockholders. The actual results, performance or achievement by Sabratek could
differ materially from those expressed in, or implied by, these forward-looking
statements and, accordingly, no assurances can be given that any of the events
anticipated by the forward-looking statements will transpire or occur, or if any
of them do so, what impact they will have on the results of operations and
financial condition of Sabratek.
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ITEM 1.
SABRATEK CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 18,209 $ 29,169
Investments in marketable securities 8,128 6,058
Receivables:
Trade, net of allowance for doubtful accounts
Of $897 and $836 at March 31, 1999
And December 31, 1998, respectively 25,005 19,386
Other 1,033 500
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Total receivables 26,298 19,856
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Inventories 24,332 23,973
Other current assets 1,389 1,316
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Total current assets 78,096 80,402
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Property, plant and equipment, net 8,538 7,618
Notes receivable 12,806 6,548
Investments in marketable securities 14,562 22,825
Intangible assets, net 34,545 32,363
Other 3,331 2,922
--------- ---------
$ 151,878 $ 152,678
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including capital lease obligation $ 33 $ 33
Accounts payable 3,723 6,969
Payroll & commissions 733 525
Warranty 336 336
Accrued expenses 3,062 1,536
Other 33 34
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Total current liabilities 7,920 9,433
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Long-term debt 85,000 85,000
Long-term obligations 312 216
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Total liabilities 93,232 94,649
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Stockholders' equity:
Preferred stock, par value $.01; 200,000 authorized, 0 issued -- --
Common stock, par value $.01; 25,000,000 authorized, 10,875,462 issued,
9,875,462 outstanding at March 31,
1999; 10,868,046 issued, 9,868,046 outstanding at December 31, 1998 109 109
Additional paid-in capital 79,316 79,220
Treasury stock (19,340) (19,340)
Other -- --
Accumulated other comprehensive income 27 232
Accumulated deficit (1,466) (2,192)
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Total stockholders' equity 58,646 58,029
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$ 151,878 $ 152,678
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
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SABRATEK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
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<S> <C> <C>
Net sales $ 13,580 $ 15,156
Cost of sales 5,452 6,728
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Gross margin 8,128 8,428
Selling, general and administrative expenses 6,403 5,666
--------------------
Operating income 1,725 2,762
--------------------
Other income (expense):
Interest income 724 215
Interest expense (1,278) (5)
Other -- --
--------------------
Net income before taxes 1,171 2,972
Provision for income taxes 445 1,012
====================
Net income $ 726 $ 1,960
====================
Basic income per share $ 0.07 $ 0.19
====================
Basic weighted average shares outstanding 9,875 10,398
====================
Diluted income per share $ 0.07 $ 0.17
====================
Diluted weighted average shares outstanding 10,160 11,723
====================
</TABLE>
SABRATEK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
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<S> <C> <C>
Net income $ 726 $ 1,960
Other comprehensive Income:
Unrealized holding gains
arising during the period (202) (7)
Less: reclassification adjustment
For amounts realized in net income (3) 3
Net unrealized gain (205) (4)
-------- --------
Comprehensive income $ 521 $ 1,956
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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SABRATEK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------
March 31, March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 726 $ 1,960
Adjustments to reconcile net income to
Net cash used in operating activities:
Depreciation and amortization 742 492
Deferred compensation - 1
Non-cash expense - -
Non-cash interest expense -
Tax effect of stock option exercises - 1,012
Provision for bad debts 62 102
Changes in assets and liabilities:
Receivables (5,680) (4,823)
Other receivable (1,999) -
Deferred revenue - -
Inventories (360) (4,082)
Other current assets (112) 45
Accounts payable (3,249) 753
Accrued liabilities 1,928 (1,045)
Long term obligations 100 304
Other (193) 74
-------------------------------------------
Net cash used in operating activities (8,035) (5,207)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, equipment (1,149) (329)
Collection (issuance) of note receivable (5,260) (387)
Purchase of intangible assets (2,596) (2,934)
Purchases of marketable securities (1,013) -
Sale and maturity of marketable securities 7,001 997
Purchase of Rocap, Inc., net of cash acquired - -
Purchase of CMS Healthcare, net of cash acquired - -
-------------------------------------------
Net cash used in investing activities (3,017) (2,653)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt - -
Repayment of long-term debt - -
Purchase of treasury stock - -
Proceeds (payments) of capital lease, net (4) (21)
Proceeds from issuance of long-term debt, net - -
Proceeds from exercise of stock options and warrants 96 1,385
Proceeds from issuance of stock, net - -
-------------------------------------------
Net cash provided by financing activities 92 1,364
-------------------------------------------
Increase in cash and cash equivalents (10,960) (6,496)
Cash and cash equivalents at beginning of period 29,169 19,598
===========================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,209 $ 13,102
===========================================
</TABLE>
See accompanying notes to consolidated financial statements
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SABRATEK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been
prepared by the Company, without audit, and include all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for fair
presentation of the results of operations for the three month periods ended
March 31, 1999 pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures in these
consolidated financial statements are adequate to make the information presented
not misleading. These consolidated financial statements should be read in
conjunction with the Company's financial statements and the notes thereto
included in the Company's Form 10-K filed by the Company with the Securities and
Exchange Commission for the year ended December31, 1998. The results of
operations for the three month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
(2) INVENTORIES
Inventories shown on the consolidated balance sheets are comprised of
the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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<S> <C> <C>
Raw materials............................... $ 11,661 $ 9,532
Work in process............................. 2,024 4,945
Finished goods, net of reserve.............. 10,647 9,496
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$ 24,332 $ 23,973
========== ==========
</TABLE>
(3) NOTES RECEIVABLE
Notes receivable represent funds owed by third parties including those
with whom the Company has entered into license agreements. The notes bear
interest at 8% and are payable upon demand by the Company or at specified future
dates.
(4) OTHER ASSETS
In January, 1999, the Company purchased preferred stock of MOON
Communication International Limited, a company organized in the United Kingdom,
for $500,000. The preferred stock is convertible at the option of the Company
into that number of voting common stock as are equal to 10% of the equity
ownership of MOON UK on a fully diluted basis. The purchase was made pursuant to
a Term Sheet entered into by the parties for which definitive documentation is
being prepared. The investment is included in Other assets on the Balance
Sheets.
(5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest during the three month periods ended March 31,
1999 and 1998 was $3,450 and $6,751, respectively.
(6) EQUITY-RELATED ACTIVITY
During the three month period ended March 31, 1999, the Company issued
2,194 shares, in aggregate, of common stock upon the exercise of stock options
pursuant to the Sabratek Corporation Amended and Restated 1993 Stock Option Plan
(the "Plan"). The option exercises resulted in proceeds to the Company of
$23,178, in aggregate. In addition, 5,222 shares of common stock were issued
pursuant to the Company's Stock Purchase Plan resulting in aggregate proceeds of
$72,690.
Options for a total of 38,550 shares of common stock were granted
during the three month period pursuant to the Plan at an exercise price equal to
the fair market value on the date of grant. The stock options vest over a
multi-year period.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sabratek'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, Sabratek 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. Sabratek has six years of operating history and
experienced significant operating losses from its inception through mid-1996.
Upon receiving FDA clearance for the 3030 Stationary Pump in mid-1992, Sabratek
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, Sabratek continued to fund the research,
development and regulatory clearance activities of other device and software
products.
Sabratek commercially launched the 6060 Ambulatory Pump and related
disposable supplies in late 1995 and both MediVIEW(TM) and the PumpMaster(TM) in
late 1996. Since then, Sabratek has continued its sales and marketing activities
domestically and internationally for the distribution of its products and
continued to fund the research and development of additional products. In
February, 1997, the Company acquired substantially all the assets of Rocap, Inc.
which produces pre-filled flush syringes. In July, 1998, Sabratek acquired CMS
Healthcare, Inc., a physician-based utilization review services provider. In
addition, July 1998 the Company derives revenues from the servicing of products,
sale of accessories, sale of extended warranties and consulting services.
Sabratek sells its products both directly to alternate-site and
acute-care providers, as well as to third-party distributors. Distributors and
other customers may purchase several months of inventory at any one time which
may cause fluctuations in quarterly revenues. Sabratek also markets and sells
its products internationally and, as a result, its revenues may be affected by
the strength of the U.S. dollar compared to other currencies. 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.
In November 1998, Sabratek announced that it had suspended distribution
of its Rocap pre-filled flush syringe product line. Sabratek also announced that
it would submit new 510(k) applications to the FDA for the Rocap pre-filled
flush syringe products and that new management was in place at Rocap for both
operations and regulatory affairs. Sabratek has submitted new 510(k)
applications but they have not been approved by the FDA. The suspension had a
material adverse affect on revenues and operating results for the first quarter
of 1999. Sabratek has incurred ongoing expenses necessary to maintain the Rocap
facilities in the event it receives approval of the 510(k) applications. Such
ongoing expenses may continue to adversely affect Sabratek's financial condition
and operating results in future periods.
Sabratek has entered into a number of strategic partnerships, including
Unitron and GDS, Collaborations in Healthcare and HealthMagic, 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
THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
Net sales. Net sales decreased $1.6 million to $13.6 million for the
three month period ended March 31, 1999 as compared to $15.2 million for the
three month period ended March 31, 1998, a decrease of 10%. The decrease for the
three month period is attributable to the suspension of distribution of the
Rocap product line which began in November, 1998. The decrease was partially
offset by increases from other revenue sources including; incremental unit sales
volume of the 3030 Stationary Pump and 6060 Ambulatory Pump and their respective
disposables, additional sales of the MediVIEW(TM) and PumpMaster(TM) products,
increased revenues generated from product licensing and
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consulting services, and an increase in unit sales volume of certain licensed
products from GDS Technology, Inc.
Cost of Sales. Cost of sales decreased $1.2 million to $5.5 million for
the three month period ended March 31, 1999 as compared to $6.7 million for the
three month period ended March 31, 1998, a decrease of 19%. The decrease for the
three month period is primarily attributable the absence of direct product costs
associated with the Rocap product line due to the suspension of distribution.
The decrease was partially offset by an increase in amortization and period
costs relating to the expansion of production capacity for products sold during
the three month period ended March 31, 1999.
Gross Margin. Gross margin decreased $300,000 to $8.1 million for the
three month period ended March 31, 1999 as compared to $8.4 million for the
three month period ended March 31, 1998, a decrease of 4%. The decrease for the
three month period ended March 31, 1999 was due to the absence of gross margin
contribution from the Rocap product line. Gross margin as a percent of sales
increased to 60% for the three month period ended March 31, 1999, as compared to
56% for the three month period ended March 31, 1998. The increase in percentage
is attributable to the absence of Rocap product sales during the three month
period ended March 31, 1999 which typically generate a lower average gross
margin percentage than products sold during the period.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased $700,000 to $6.4 million for the three month
period ended March 31, 1999 as compared to $5.7 million for the three month
period ended March 31, 1998, an increase of 13%. The increase for the three
month period is due primarily to the expansion of the direct sales force and
clinical support staff and associated travel, as well as the addition of
administrative and management personnel. Included in selling, general and
administrative expenses for the three month period ended March 31, 1999 was $1.6
million in ongoing costs relating to maintaining a state of readiness of the
Rocap facilities. Selling, general and administrative expenses as a percent of
sales increased to 47% for the three month period ended March 31, 1999 as
compared to 37% for the three month period ended March 31, 1998.
Operating Income. Operating income decreased $1.1 million to $1.7
million for the three month period ended March 31, 1999 as compared to $2.8
million for the three month period ended March 31, 1998, a decrease of 38%.
Operating income as a percent of sales decreased to 13% for the three month
period ended March 31, 1999 as compared to 18% for the three month period ended
March 31, 1998. The decrease in operating income was due primarily to the
absence of sales and gross margin from the Rocap product line and the increase
in selling, general and administrative expenses referred to above, during the
three month period ended March 31, 1999.
Interest Income. Interest income increased $500,000 to $700,000 for the
three month period ended March 31, 1999 as compared to $200,000 for the three
month period ended March 31, 1998, an increase of 237%. The increase is
attributable to a higher average amount of cash available for investment as
compared to that of the comparative period. Sabratek completed the sale of 6%
convertible notes in April, 1998 which resulted in net proceeds of approximately
$82.1 million.
Interest Expense. Interest expense increased to $1.3 million for the
three month period ended March 31, 1999 as compared to $5,000 for the three
month period ended March 31, 1998. The increase for the three month period is
attributable to the sale of 6% convertible notes in April, 1998, for which
interest expense is recorded at a rate of $1.3 million per full fiscal quarter.
Interest expense would be reduced proportionately for any notes converted into
common stock.
Provision for Income Taxes. The provision for income taxes decreased
$600,000 to $400,000 for the three month period ended March 31, 1999 as compared
to $1.0 million for the three month period ended March 31, 1998, a decrease of
56%. The provision for income taxes for the three month period ended March 31,
1999 reflects an estimated 38% effective annual tax rate, after adjusting for
allowable net operating loss carryforwards, as compared to an estimated 34%
effective annual tax rate for the three month period ended March 31, 1998.
Utilization of net operating carryforwards depends on future earnings and will
be subject to annual limitations as a result of changes that occurred in
Sabratek's ownership in prior years.
Net Income. Net income decreased $1.3 million to $726,000 for the three
month period ended March 31,
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1999 as compared to $2.0 million for the three month period ended March 31,
1998, a decrease of 63%. The decrease in net income was due primarily to the
absence of sales and gross margin from the Rocap product line and the increase
in selling, general and administrative expenses referred to above, during the
three month period ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
In April, 1998, the Sabratek completed an institutional private
placement of 6% Convertible Notes in an aggregate principal amount of
$85,000,000 maturing in 2005. The interest is fixed and is payable
semi-annually. The notes are convertible into Sabratek's common stock at a
conversion price of $40.46 anytime at the option of the noteholders. Sabratek
may redeem the notes at anytime after April 18, 2001. Net proceeds were
approximately $82.1 million and such proceeds were used to purchase investment
grade securities.
As of March 31, 1999, Sabratek had approximately $40.9 million in cash,
cash equivalents, and investments in marketable securities, and had net working
capital of approximately $70.2 million. During the three month period ended
September 30, 1998, approximately $19.3 million was used to purchase outstanding
common stock of Sabratek pursuant to a repurchase program approved by the
Company's Board of Directors. In April, 1999, Sabratek entered into a one-year
credit agreement with a financial institution with up to $8.0 million of
available borrowing. As of this date, no borrowing had occurred under the credit
agreement.
The Sabratek used cash in its operations of approximately $8.0 million
for the three month period ended March 31, 1999. Cash used in operations is
primarily attributable to reduced cash receipts resulting from extended payment
terms offered to specific international and domestic customers. Payment terms
with customers range from net 30 days to more than one year in some cases.
During the third quarter of 1997, Sabratek entered into strategic
partnerships with Unitron and GDS and has paid cash license fees of $16.4
million as of March 31, 1999, in aggregate. In addition, should the Company
decide to exercise its right to acquire either Unitron or GDS, such acquisitions
could require additional outlays of cash. In November, 1998, Sabratek entered
into a Software Licensing and Marketing Agreement with HealthMagic, Inc. whereby
Sabratek paid license fees of $10.0 million.
In October, 1998, Sabratek entered into a Standby Senior Credit
Facility with Unitron whereby Sabratek, at its sole discretion, may lend up to
$10.0 million at an interest rate of 8% per annum. As of March 31, 1999,
Sabratek had advanced $8.1 million. The facility matures on October 15, 2003.
In November, 1998, Sabratek entered into a Standby Senior Credit
Facility with Collaborations in Healthcare, LLC whereby Sabratek may lend up to
$4.0 million at an interest rate of 8% per annum. As of March 31, 1999, Sabratek
had advanced $2.7 million. The facility matures on November 23, 2001.
Simultaneously, the parties entered into a Unit Option Agreement whereby
Sabratek has the right to acquire Collaborations in Healthcare, LLC. If such
right is exercised, the acquisition may require additional outlays of cash.
In September, 1997, Sabratek initiated a hedging program through the
use of forward contracts to minimize foreign currency fluctuation exposure. As
of March 31, 1999, the aggregate U.S. dollar amount of the contracts is
approximately $560,000 and such contracts expire at various dates through July,
1999.
Sabratek has the right to acquire the assets or stock of Unitron, GDS,
and Collaborations in Healthcare, LLC. Although it is not obligated to do so,
Sabratek may use cash to consummate such acquisitions. If Sabratek uses its cash
reserves to consummate these or other acquisitions currently unidentified or
under preliminary consideration it will materially reduce its liquidity.
Although Sabratek cannot predict the effect of the uncertainties listed below,
Sabratek does not currently expect the use of its cash reserves in connection
with acquisitions to have an adverse affect on the results of its operations.
In March, 1999, Sabratek entered into a letter of intent to purchase
the LifeWatch, Inc. subsidiary of privately held Ralin Medical, Inc. LifeWatch,
Inc. provides cardiac monitoring and diagnostic services. The purchase is
subject
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to certain conditions including approval by Sabratek's Board of Directors,
completion of due diligence, and consummation of a definitive purchase
agreement. The purchase price is expected to be approximately $28.0 million,
payable in a combination of cash and Sabratek common stock. Cash used in this
transaction will materially reduce Sabratek's liquidity.
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, continued disruption of distribution of the Rocap product
line, pending litigation, and others. There can be no assurance that Sabratek
will not require additional financing and, 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
affects to its financial condition and the results of its operations.
YEAR 2000 STATUS
Since their inception, all of Sabratek's products, including software,
have been developed with consideration for the millennium change. Additionally,
the products have undergone specific year 2000 date testing to verify and
validate compliance. Although Sabratek knows of no problems in this regard, due
to the ability of certain of Sabratek's products to interact with other devices
or software, Sabratek can give no assurance that the performance of its products
could not be directly and indirectly affected by non-compliant products of a
third party.
Sabratek has made inquiry of its material strategic partners and has
received representation that the devices and software that Sabratek currently
licenses from third parties have been determined to be year 2000 compliant.
Sabratek continues the process of verifying that its suppliers and other
electronically date sensitive equipment will not experience year 2000 problems
that could have a material adverse affect on Sabratek. The cost to Sabratek to
assess and prepare for the year 2000 is estimated to be less than $100,000.
Sabratek has assessed its systems and believes them to be year 2000
compliant. Sabratek will continue to assess its year 2000 exposure, including
systems of third parties on which Sabratek relies. If Sabratek's management
becomes aware of non-compliant systems that will adversely affect Sabratek or
its products, it will develop an action plan and assess the resources necessary
to resolve such problem.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in Sabratek's market risk during the three
month period ended March 31, 1999. For additional information refer to Item 7A
in Sabratek's Annual Report in form 10-K for the year ended December 31, 1998.
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PART II
OTHER INFORMATION
ITEM 1. 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(TM) 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(TM) system. On August 4,
1997, the District Court denied the motion for preliminary injunction.
Additionally, one of the claims against a Sabratek employee has been dismissed
with prejudice. Sabratek 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
Sabratek's business, financial condition and results of operations.
In addition, on June 27, 1997, Sabratek filed a complaint against SIMS
Deltec which is currently pending in the United States District Court for the
District of Minnesota 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. On July 15, 1998, the United States District Court for the District of
Minnesota stayed all proceedings in the action until August 2, 1999.
Sabratek was served with a complaint of January 27, 1999, alleging that
Sabratek and seven officers and former officers violated Sections 10(b) (and
Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of
1934. The complaint alleges that defendants issued a series of false and
misleading statements concerning Sabratek's business, its products and its
prospects for future profitability.
The complaint seeks to recover damages on behalf of all persons who
purchased shares of Sabratek's common stock between January 13, 1998 and
November 24, 1998, although no court has determined that these persons
constitute a proper class. The complaint was filed in the United States District
Court for the Northern District of Illinois (Chu v. Sabratek Corporation, et
al., Docket No. 99 C 0351). On April 28, 1999, the United States District Court
for the Northern District of Illinois appointed Millberg Weiss Bershard & Lerach
as lead counsel for the plaintiffs in the action. Neither Sabratek nor the
individual defendants have yet responded to the complaint, but all parties
intend to vigorously defend against the allegations contained in the complaint.
Protracted litigation or an adverse outcome in this matter could have a material
adverse impact on Sabratek's business, financial position and results of
operations.
Sabratek is also a party to routine litigation in the ordinary course
of business, none of which, if determined adversely to Sabratek, would
individually or in the aggregate have a material adverse effect on Sabratek.
ITEM 2. CHANGES IN SECURITIES
During the three month period ended March 31, 1999, Sabratek issued no
securities without registration under the Securities Act of 1933, as amended.
ITEM 5. OTHER INFORMATION
In May, 1999, Sabratek announced that it had appointed Mr. John Reilly
as Senior Vice President and Chief
-12-
<PAGE> 13
Financial Officer. Mr. Reilly replaces Mr. Paul Jurewicz who resigned from the
position to pursue personal business interests.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
Incorporation
Exhibit by reference (if
Number Description of Documents applicable)
----------------
<S> <C>
3.1 Articles of Incorporation, Rights Agreement Certificate of
Designations....................................................................................+
3.2 Amended and Restated By-laws...........................................................++++++++++
4.1 Indenture, dated April 14, 1998 by and between the Company
and LaSalle National Bank, as Trustee......................................................++++++
4.2 Rights Agreement, dated August 20, 1998 by and between the
Company and LaSalle National Bank, as the Rights Agent....................................+++++++
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 Intentionally Omitted
10.3 Intentionally Omitted
10.4 Intentionally Omitted
10.5 Intentionally Omitted
10.6 Intentionally Omitted
10.7 Intentionally Omitted
10.8 Intentionally Omitted
10.9 Intentionally Omitted
10.10 Intentionally Omitted
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............................................................................+
10.15 Sales & Marketing Agreement with Alpha
Group, dated November 6, 1995...................................................................+
10.16 Intentionally Omitted
10.17 Intentionally Omitted
10.18 Intentionally Omitted
10.19 Intentionally Omitted
10.20 Intentionally Omitted
10.21 Intentionally Omitted
10.22 Intentionally Omitted
10.23 Intentionally Omitted
10.24 Intentionally Omitted
10.25 Intentionally Omitted
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.........................................+++
</TABLE>
-13-
<PAGE> 14
<TABLE>
<CAPTION>
Incorporation
Exhibit by reference
Number Description of Documents (if applicable)
- ------ ------------------------ ---------------
<S> <C>
10.28 Employment Agreement for K. Shan Padda.................................................++++++++++
10.29 Intentionally Omitted
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...........................................+++++
10.36 Lease Agreement for property located at 8350 Parkline Blvd.,
Orlando Florida, dated June 18, 1998.....................................................++++++++
10.37 Credit Agreement, dated as of March 26, 1997, by and between
the Company as Borrower and LaSalle National Bank
(formerly known as LaSalle Bank NI) as Lender..............................................++++++
10.38 Long Term Incentive Compensation Plan...................................................+++++++++
10.39 Lease Agreement for property located at 8111 North St. Louis,
Skokie, Illinois, dated May 15, 1998....................................................+++++++++
10.40 Employment Agreement for Doron C. Levitas..............................................++++++++++
10.41 Employment Agreement for Scott Skooglund...............................................++++++++++
10.42 Employment Agreement for Joseph Moser..................................................++++++++++
10.43 Employment Agreement for Vincent J. Capponi............................................++++++++++
10.44 Employment Agreement for Tuan Bui......................................................++++++++++
10.45 Employment Agreement for Stephan C. Beal...............................................++++++++++
10.46 Employment Agreement for Stephen L. Axel ..............................................++++++++++
10.47 Employment Agreement for Paul Jurewicz.................................................++++++++++
10.48 Employment Agreement for Mary Beth Blue................................................++++++++++
10.49 Employment Agreement for Steven J. Richard.............................................++++++++++
11.1 Statement re: computation of per share earnings
27 Financial Data Schedule
+ Incorporated by reference to Sabratek's Registration Statement on Form S-1,
declared effective by the SEC on June 21, 1996 (File No. 333-3866).
++ Incorporated by reference to Sabratek's Current Report on Form 8-K filed with the SEC on March
11, 1997.
++ Incorporated by reference to Sabratek's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 filed with
the SEC on March 31, 1997.
++++ Incorporated by reference to Sabratek's Registration Statement on Form S-1, declared effective by
the SEC on April 4, 1997 (File No. 333-23437).
</TABLE>
-14-
<PAGE> 15
<TABLE>
<CAPTION>
Incorporation
Exhibit by reference (if
Number Description of Documents applicable)
- ------ ------------------------ -----------
<S> <C>
+++++ Incorporated by reference to Sabratek's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 filed with the SEC on May 15, 1997.
++++++ Incorporated by reference to Sabratek's Registration Statement on Form S-3 declared effective
by the SEC on July 14, 1998.
+++++++ Incorporated by reference to Sabratek's Current Report on Form 8-K filed with the SEC on August
25, 1998.
++++++++ Incorporated by reference to Sabratek's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 filed with the SEC on August 14, 1998.
+++++++++ Incorporated by reference to Sabratek's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 filed with the SEC on November 16, 1998.
++++++++++ Incorporated by reference to Sabratek's Annual Report on Form 10-K, as amended, for the fiscal year
ended December 31, 1998 filed with the SEC on March 26, 1999.
</TABLE>
(B) REPORTS ON FORM 8-K
Sabratek filed a Current Report on Form 8-K on February 3,
1999 reporting that it had been served with a complaint in the
case captioned Chu v. Sabratek, et al., Docket No. 99C 0351.
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SABRATEK CORPORATION
Date: May 14, 1999 By: /s/ K. Shan Padda
---------------------------------------------
K. Shan Padda
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the undersigned, in his capacity as the President
of the registrant.
Date: May 14, 1999 By: /s/ Stephen L Holden
--------------------------
Stephen L. Holden
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the undersigned, in his capacity as the principal
financial officer of the registrant.
Date: May 14, 1999 By: /s/ John Reilly
---------------------------------------------
John Reilly
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the undersigned, in his capacity as the chief
accounting officer of the registrant.
Date: May 14, 1999 By: /s/ Scott Skooglund
---------------------------------------------
Scott Skooglund
Chief Accounting Officer
-16-
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
March 31, March 31,
1999 1998
-------------------------------------
<S> <C> <C>
Net income (in thousands) $ 726 $ 1,960
=====================================
Weighted average common shares outstanding 9,874,613 10,397,714
=====================================
Basic income per share $ 0.07 $ 0.19
=====================================
Dilutive effect of options and warrants
outstanding under treasury-stock method 285,020 1,325,296
=====================================
10,159,633 11,723,010
=====================================
Diluted income per share $ 0.07 $ 0.17
=====================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,209,259
<SECURITIES> 22,689,767
<RECEIVABLES> 25,901,902
<ALLOWANCES> 897,127
<INVENTORY> 24,332,367
<CURRENT-ASSETS> 78,096,498
<PP&E> 11,040,605
<DEPRECIATION> 2,502,927
<TOTAL-ASSETS> 151,878,092
<CURRENT-LIABILITIES> 7,920,711
<BONDS> 85,000,000
0
0
<COMMON> 108,755
<OTHER-SE> 58,537,396
<TOTAL-LIABILITY-AND-EQUITY> 151,878,092
<SALES> 12,330,348
<TOTAL-REVENUES> 13,580,187
<CGS> 5,452,603
<TOTAL-COSTS> 5,452,603
<OTHER-EXPENSES> 6,403,001
<LOSS-PROVISION> 61,527
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,169,845
<INCOME-TAX> 445,000
<INCOME-CONTINUING> 726,143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 726,143
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
