UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended SEPTEMBER 30, 1997
------------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ ___________to
Commission file number 2-85008-NY
----------
MEDICAL STERILIZATION, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer specified in its character)
NEW YORK 11-2621408
------------------------------- -----------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 UNDERHILL BOULEVARD, SYOSSET, NEW YORK 11791
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 496-8822
- --------------------------------------------------------------------------------
(Issuer's telephone number)
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the issuer (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 |_|
Number of shares of Common Stock, $.01 par value, outstanding as of September
30, 1997.
3,170,496 shares
---------
Transitional Small Business Disclosure Format (Check One) Yes |_| No |X|
<PAGE>
MEDICAL STERILIZATION, INC.
INDEX
Page No.
Part I. Financial Information
Balance Sheet as of September 30, 1997 (unaudited) ............. 3 - 4
Statements of Operations for the nine months
ended September 30, 1997 and September 30, 1996
(unaudited) .................................................... 5
Statements of Operations for the three months
ended September 30, 1997 and September 30, 1996
(unaudited) .................................................... 6
Statements of Cash Flows for the nine months ended September
30, 1997 and September 30, 1996
(unaudited) .................................................... 7
Notes to Consolidated Financial Statements ..................... 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations .................. 9 - 13
Part II. Other Information ............................................. 14
Signatures ....................................................... 14
2
<PAGE>
MEDICAL STERILIZATION, INC.
Balance Sheet
September 30,1997
ASSETS (unaudited)
------ -----------------
Current assets
Cash $ 167,641
Accounts receivable, less allowance for
doubtful accounts of $146,580 2,380,108
Inventory 124,578
Prepaid expenses 96,326
----------
Total current assets 2,768,653
----------
Fixed assets, at cost, less accumulated
depreciation and amortization 4,603,639
Other assets 205,815
----------
Total assets $7,578,107
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 761,746
Short term note payable 113,914
Deposits Payable 150,000
Current maturities of long-term debt 650,000
Current obligation under capital lease 166,993
----------
Total current liabilities 1,842,653
----------
Long-term liabilities
Long-term debt, less current maturities 1,803,714
Obligation under capital lease 635,364
----------
Total liabilities 4,281,731
----------
Commitment and contingencies (Note 4):
Preferred Stock
Convertible redeemable cumulative preferred
stock, par value $.01 per share, Series B
Authorized 1,000,000 shares, issued and
outstanding 687,500 shares 1,760,616
----------
Continued
See notes to financial statements
3
<PAGE>
MEDICAL STERILIZATION, INC.
Balance Sheet
Continued
September 30, 1997
(unaudited)
------------------
Shareholders' equity
Convertible Preferred Stock Series C
Authorized 2,000,000 shares, issued
and outstanding 1,945,625 shares 1,945,625
Common stock, par value $.01 per share
Authorized 10,000,000 shares, issued
and outstanding 3,170,496 shares 31,704
Additional paid-in capital 7,731,872
Accumulated deficit (8,173,441)
-----------
Shareholders' equity 1,535,760
-----------
Total liabilities and shareholders' equity $ 7,578,107
===========
See notes to financial statements
4
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Operations
(Unaudited)
For the nine months
ended September 30,
-------------------
1997 1996
---- ----
Income
- ------
Revenue $7,248,963 $ 6,346,668
---------- -----------
7,248,963 6,346,668
Costs and Expenses
- ------------------
Operating 4,877,400 4,512,596
Selling, general and administrative 1,635,064 1,908,053
Interest 335,842 220,572
---------- -----------
6,848,306 6,641,221
---------- -----------
Income (loss) before income taxes 400,657 (294,553)
Income taxes 0 0
---------- -----------
Net income (loss) 400,657 (294,553)
Preferred stock dividends 92,664 92,664
---------- -----------
Net income (loss) applicable to common
shareholders $ 307,993 $ (387,217)
========== ===========
Weighted average shares of common stock
outstanding 5,534,285 3,005,496
---------- -----------
Net income (loss) per share of common
stock (Note 2) $ .06 $ (.13)
========== ===========
See notes to financial statements
5
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Operations
(Unaudited)
For the three months
ended September 30,
--------------------
1997 1996
Income
- ------
Revenue $2,516,069 $ 2,132,389
---------- -----------
2,516,069 2,132,389
Costs and Expenses
- ------------------
Operating 1,715,999 1,574,067
Selling, general and administrative 475,663 707,555
Interest 127,205 101,790
---------- -----------
2,318,867 2,383,412
---------- -----------
Income (loss) before income taxes 197,202 (251,023)
Income taxes 0 0
---------- -----------
Net income (loss) 197,202 (251,023)
Preferred stock dividends 30,888 30,888
---------- -----------
Net income (loss) applicable to common
shareholders $ 166,314 $ (281,911)
========== ===========
Weighted average shares of common stock
outstanding 5,439,300 3,005,496
---------- -----------
Net income (loss) per share of common
stock (Note 2) $ .03 $ (.09)
========== ===========
See notes to financial statements
6
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 400,656 $ (294,553)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 508,761 471,501
Changes in assets and liabilities:
Decrease (increase) in receivables 28,947 (313,140)
(Increase) decrease in inventory (3,503) 6,523
(Increase) in prepaid expenses (58,946) (187,455)
(Increase) in other assets (45,396) (6,555)
Increase in deposits payable 150,000 0
(Decrease) increase in accounts payable
and accrued expenses (837,805) 914,724
--------- -----------
Net cash provided by operating activities 142,714 591,045
--------- -----------
Cash flows from investing activities:
Capital expenditures (162,261) (1,101,324)
--------- -----------
Net cash used in investing activities (162,261) (1,101,324)
--------- -----------
Cash flows from financing activities:
Proceeds from exercise of options 0 2,500
Registration costs (18,000) (24,156)
Borrowing under financing agreement 187,773 315,686
(Repayment) borrowing under
short-term notes payable (19,131) 43,518
Borrowing (repayment) of long-term debt 33,021 (171,456)
(Repayment) borrowing under
capital lease obligations (72,178) 190,063
--------- -----------
Net cash provided by financing activities 111,485 356,155
--------- -----------
Net increase (decrease) in cash 91,938 (154,124)
Cash at beginning of period 75,703 175,390
--------- -----------
Cash at end of period $ 167,641 $ 21,266
========= ===========
</TABLE>
See notes to financial statements
7
<PAGE>
MEDICAL STERILIZATION, INC.
Notes to Financial Statements
1. Unaudited Statements:
The accompanying unaudited financial statements have been prepared by the
Company in accordance with generally accepted accounting principles,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the accompanying
financial statements contain all adjustments necessary to present a fair
statement of the results for the interim period presented. It is suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report filed
on Form 10-KSB for the year ended December 31, 1996.
2. Net Income Per Share of Common Stock:
Net Income per share of common stock is based on the weighted average
number of shares of common stock outstanding during each period adjusted
for undeclared dividends on Preferred Stock. Common stock equivalents of
approximately 2,400,000 shares have been included for the computation of
net income per share for the nine months ending September 30, 1997. Common
stock equivalents had been excluded from the computation of net income per
share of common stock for the nine months ending September 30, 1996 since
the result would be anti-dilutive.
3. Earnings Per Share Calculation:
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which establishes standards for computing and presenting
Earnings per Share (EPS). SFAS No. 128 will be effective for financial
statements issued for periods ending after December 15, 1997. Earlier
application is not permitted. There will not be a significant difference
in earnings per share on a fully diluted basis.
4. Subsequent Events:
In October, 1997, the client-auditor relationship with Coopers & Lybrand
L.L.P. was terminated, and the Company engaged Price Waterhouse L.L.P. as
its auditor for the year ending December 31, 1997.
In October, 1997, the Company announced the recent signing of an agreement
extending and modifying its financing agreement with its commercial
lender. The agreement was extended to January 31, 2000, and the advance
rate on the Company's eligible Accounts Receivable was increased to 85%
from the existing 75%. The new agreement also improves availability at a
significantly reduced cost of funds.
8
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Current Assets have increased approximately $125,000 to $2,768,653 at
September 30, 1997 compared to $2,643,213 at December 31, 1996. The increase was
primarily due to a $91,938 increase in cash, a $58,946 increase in prepaid
expenses (primarily insurance) offset partially by a $28,947 decrease in
accounts receivable. The Company had positive working capital of approximately
$926,000 at September 30, 1997 compared to positive working capital of
approximately $292,458 at December 31, 1996. The increase of approximately
$633,542 was the result of a $837,805 decrease in accounts payable and accrued
expenses, an additional $300,000 decrease in accounts payable owed to a
subsidiary of Teleflex, Inc., in exchange for the Company's issuance of 150,000
shares of its common stock to TFX Equities, Inc., a wholly owned subsidiary of
Teleflex, Inc., for $2.00 per share in February, 1997, an increase of $91,938 in
cash and a $58,946 increase in prepaid expenses (primarily insurance), offset by
the loan agreement with TFX Equities, Inc., of $500,000 due January 31, 1998, a
royalty deposit of $150,000 related to the sale of the contract sterilization
services effective December 31, 1997, and a $28,947 decrease in accounts
receivable. There was an increase in the working capital ratio, to 1.50 to 1 at
September 30, 1997 versus 1.12 to 1 at December 31, 1996. This was directly the
result of the reductions in accounts payable and accrued expenses described
above.
In April, 1997, the Company entered into a master lease agreement with
North Fork Bank in the amount of $1,500,000. The lease provides for draw downs
to purchase instruments for inventory and will be classified as an operating
lease. The agreement has an interest rate of prime plus 1/2 percent which is set
at each draw down. The lease agreement is guaranteed by Teleflex, Inc.
In May, 1997, the Company and TFX Equities, Inc., announced the formation
of a joint venture company named SSI Surgical Services, Inc. ("SSI"). Another
Teleflex subsidiary, Endoscopy Specialists, Inc. ("ESI"), which owns and manages
endoscopic and specialized instrumentation and provides on-site processing
services, will also participate in the joint venture. The mission of SSI will be
to join the Company with ESI into a total instrument management solution and
provide these services to individual hospitals and hospital networks throughout
North America.
9
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
Under the agreement, the Company will remain as an independent public
entity, whose territory will encompass the greater Northeast United States,
including New England, New York, New Jersey and Pennsylvania. In this territory,
which accounts for approximately 20 percent of the surgical procedures in the
United States, the Company will continue to provide its instrument management
and sterilization services. SSI will be responsible for marketing and delivering
these same services to the remainder of the United States and Canada.
Terms of the agreement provide that TFX Equities, Inc. will own 62.5
percent of the common shares of SSI and the Company will own the remaining 37.5
percent. The Company will contribute personnel and know-how, including its
proprietary multi-hospital tracking system and a developing customer list in
select highly populated urban centers. TFX Equities will provide the initial
operating and project capital required to fund expansion into markets as SSI
contracts are executed. ESI will also contribute its know how.
In September, 1997, SSI signed and commenced implementation of its first
multi-year on site contract to provide management and sterile processing
services to a large mid-Atlantic hospital. When fully implemented, the aggregate
value of this contract will be several million dollars.
The Company continues to expand its regional customer base, and has
recently signed new agreements with two area hospitals to generate additional
annual revenues in excess of $750,000. Net new annual hospital business
contracted year to date in 1997 is approximately $2,700,000. Several additional
contracts are currently under negotiation.
The Company believes that the anticipated future cash flow from
operations, along with its cash on hand and available funds under its working
capital line of credit will be sufficient to meet working capital requirements
during 1997.
INFLATION
The Company does not anticipate that inflation will have any significant
effect on its business particularly since the United States, the only market in
which the Company currently intends to operate, is presently experiencing a
relatively low rate of inflation.
10
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
RESULTS OF OPERATIONS
REVENUES
Revenues for the nine months ended September 30, 1997 increased
approximately $902,000 or 14.2% to approximately $7,249,000 from revenues of
approximately $6,347,000 for the nine months ended September 30, 1996. The
increase in revenues was primarily attributable to an approximate $574,000
increase in revenues or a 15.9% increase in the Company's revenues in its
hospital services division, an approximate $308,000 increase or a 14.9% increase
in the Company's revenues in its radiation processing of industrial products
services, and an approximate $20,000 increase in revenues or a 2.9% increase in
the Company's contract sterilization services.
Revenues for the three months ended September 30, 1997 increased
approximately $384,000 or 18.0% to approximately $2,516,000 from revenues of
approximately $2,132,000 for the three months ended September 30, 1996. The
increase in revenues was primarily attributable to an approximate $328,000
increase in revenues or a 27.4% increase in the Company's revenues in its
hospital services division, an approximate $87,000 increase or a 12.5% increase
in the Company's revenues in its radiation processing of industrial products
services, partially offset by an approximate $31,000 decrease in revenues or a
12.8% decrease in the Company's contract sterilization services.
In March 1997, the Company entered into a purchase and sale agreement with
Shamrock Technologies, Inc. ("Shamrock"), to sell the Company's electron beam
accelerator. Under the agreement the Company would receive $1,250,000 for the
Accelerator and related equipment with closing of the transaction being
estimated as April, 1998, at which time title to the Accelerator would be
transferred to Shamrock. In addition, Shamrock has posted a $500,000 standby
letter of credit in escrow. Upon consummation of the sale of the electron beam
accelerator to Shamrock and the remaining contract sterilization and industrial
processing services to E-BEAM Services, Inc. ("E-BEAM"), the Company will be
relying on revenues from its sterilization processing of Surgical Instrument
Sets. Revenue generated by the Accelerator to be sold approximated $3,800,000
and $4,061,000 in 1996 and 1995, respectively. Management intends to replace
these revenues with revenues from its Surgical Instrument Set business. Both
transactions will provide significant improvement to balance sheet liquidity
during the second quarter of 1998.
11
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
In April 1997, the Company entered into a joint marketing agreement and an
agreement to sell its contract sterilization services to E-BEAM effective
December 31, 1997. Under the terms of the agreement, the Company will receive a
maximum purchase price of $350,000 for the business based on a schedule of
royalties earned at up to 15% of related revenues from January 1, 1998 to
December 31, 2000. The Company received a $150,000 deposit on the sale which is
nonrefundable and is to be applied to the first $150,000 of royalties.
COSTS AND EXPENSES
Total expenses increased approximately $207,000 or 3.1% to approximately
$6,848,306 for the nine months ended September 30, 1997 compared to
approximately $6,641,221 for the nine months ended September 30, 1996. Operating
expenses have increased approximately $365,000 or 8.1% due primarily to
increases in labor and benefits to support the increased sales volume. Selling,
general and administrative expenses have decreased approximately $273,000 or
14.3% due primarily to the Company's continued strategy to reduce discretionary
costs, in addition to, certain national marketing expenses being borne by SSI
whereas last year they were borne by the Company and reduced legal expenses.
Interest expense increased approximately $115,000 or 52.3% due to the timing of
increased capital lease expense incurred in the purchase of surgical instruments
and other equipment and the additional borrowing of $500,000 from TFX Equities,
Inc.
Total expenses decreased approximately $65,000 or 2.7% to approximately
$2,318,867 for the three months ended September 30, 1997 compared to
approximately $2,383,412 for the three months ended September 30, 1996.
Operating expenses have increased approximately $142,000 or 9.0% due to
increases in labor and benefits to support increased sales volume. Selling,
general and administrative expenses have decreased approximately $232,000 or
32.8% due primarily to the Company's continued strategy to reduce discretionary
costs, in addition to, certain national marketing expenses being borne by SSI
whereas last year they were borne by the Company and reduced legal expenses.
Interest expense increased approximately $25,000 or 25.0% due to the timing of
increased capital lease expense incurred in the purchase of surgical instruments
and other equipment and the additional borrowing of $500,000 from TFX Equities,
Inc..
12
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
NET INCOME (LOSS)
APPLICABLE TO COMMON SHAREHOLDERS
Net income applicable to common shareholders was approximately $308,000 or
$.06 per share for the nine months ended September 30, 1997 compared to net
(loss) of approximately ($387,000) or ($.13) per share for the nine months ended
September 30, 1996.
Net income applicable to common shareholders was approximately $166,000 or
$.03 per share for the three months ended September 30, 1997 compared to net
(loss) of approximately ($282,000) or ($.09) per share for the three months
ended September 30, 1996.
13
<PAGE>
MEDICAL STERILIZATION, INC.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(b) Registrant filed a Current Report on Form 8-KSB, dated October 1,
1997, in respect to a change in Registrant's Certifying Accountant.
Registrant filed a Current Report on Form 8-KSB dated October 27,
1997, in respect to a change in Registrant's Certifying Accountant.
This Form 10-QSB contains statements concerning certain trends and other
forward-looking information affecting or relating to the Company and its
industry that are intended to qualify for the protections afforded
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. There are many important factors that could cause actual results to
differ materially from those in the forward-looking statements. Many of these
important factors are outside MEDICAL STERILIZATION, INC.'s control. Changes in
market conditions, including competitive factors and changes in government
regulations, could cause actual results to differ materially from the Company's
expectations. No assurance can be provided as to any future financial results.
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.
MEDICAL STERILIZATION, INC.
Date October 30, 1997 /s/ D. Michael Deignan
----------------------------------------
D. Michael Deignan, President/C.E.O. and
Principal Financial Officer
/s/ Ivan Zubin
----------------------------------------
Ivan Zubin, Director of Finance and
Principal Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 167,641
<SECURITIES> 0
<RECEIVABLES> 2,526,688
<ALLOWANCES> (146,580)
<INVENTORY> 124,578
<CURRENT-ASSETS> 2,768,653
<PP&E> 12,836,510
<DEPRECIATION> (8,232,871)
<TOTAL-ASSETS> 7,578,107
<CURRENT-LIABILITIES> 1,842,653
<BONDS> 0
0
1,760,616
<COMMON> 31,704
<OTHER-SE> 1,504,056
<TOTAL-LIABILITY-AND-EQUITY> 7,578,107
<SALES> 7,248,963
<TOTAL-REVENUES> 7,248,963
<CGS> 4,877,400
<TOTAL-COSTS> 6,512,464
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 335,842
<INCOME-PRETAX> 400,657
<INCOME-TAX> 0
<INCOME-CONTINUING> 400,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 307,993
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.06
</TABLE>
