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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1997
|_| Transition report under 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 as specified in its charter)
New York 11-2621408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Underhill Boulevard, Syosset, New York 11791
(Address of principal executive offices) (Zip Code)
(516) 496-8822
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check 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 Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. |X| Yes |_| No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
The Issuer's revenues for the fiscal year ended December 31, 1997 were
$9,890,277. As of March 20, 1998, the aggregate market value of the Issuer's
voting stock (including common stock, Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock) held by non-affiliates was approximately
$2,052,978 based on the average bid and asked price of the Issuer's Common Stock
on March 20, 1998 as reported on the Nasdaq Bulletin Board System.
As of March 20, 1998, there were 3,170,496 shares of the Issuer's Common Stock,
par value $.01 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in Part III of
this Form 10-KSB: (1) Proxy Statement for the Issuer's 1998 Annual Meeting of
Shareholders - Items 9, 10, 11 and 12.
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Item 1. Description of Business
Overview
Medical Sterilization, Inc. ("MSI" or the "Company") provides off-site
reprocessing and sterilization of the Company's standard containerized
reprocessable sterilized surgical instrument sets ("Instrument Sets") as well as
certain other items requiring sterilization ("Sterilizable Items") for
healthcare providers such as hospitals, hospital networks and ambulatory
surgi-centers. See "Sterilization Services for Healthcare Providers". In 1997
MSI also provided contract steam, Ethylene Oxide ("EtO"), and radiation
sterilization services for manufacturers of disposable medical products such as
bandages, sponges, tracheotomy kits, surgical gloves and laboratory ware. See
"Contract Sterilization of Disposable Medical Products". In addition, in 1997
the Company utilized its electron beam radiation accelerator (the "Accelerator")
to process various industrial products, to perform certain modifications to
those products and to process polytetrafluoroethylene ("PTFE"). See "Radiation
Processing of Industrial Products". In furtherance of its decision to focus on
its Instrument Set sterilization processing business, on March 17, 1997, MSI
agreed to sell its Accelerator to Shamrock Technologies, Inc. ("Shamrock") with
title to pass no later than April 30, 1998. Furthermore, in order to maximize
the value of its remaining contract sterilization and industrial processing
business and to provide stability for its accelerator processing customers, on
April 9, 1997, MSI executed a Joint Marketing Agreement with E-BEAM Services,
Inc. ("E-BEAM").
The Company provides its off-site reprocessing and sterilization services
and pre-sterilized reprocessable Instrument Sets to hospitals, hospital networks
and ambulatory surgi-centers in New York, New Jersey, Pennsylvania and the New
England states, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire
and Maine (the "Northeast Corridor"). On May 16, 1997, the Company entered into
a Joint Venture Agreement with TFX Equities Incorporated ("TFX"), a wholly owned
subsidiary of Teleflex, Incorporated ("Teleflex"), setting the terms of
participation, capitalization and operation of a corporation to be known as SSI
Surgical Services, Inc. ("SSI"). In January, 1997, TFX had acquired all of the
Company's outstanding Convertible Preferred Stock from the previous owner of
such stock and in January, 1997, TFX acquired an additional 150,000 shares of
common stock. As a result, TFX now controls approximately 48% of the Company's
voting stock. The purpose of the Joint Venture is to market the offsite
reprocessing and sterilization of surgical instruments and the management of
on-site sterilization services to hospitals and healthcare facilities in all of
North America. The Company's principal territory is the Northeast Corridor, but
it has agreed with SSI to cooperate on proposals for management of in-house
processing for healthcare providers in the Northeast Corridor. TFX owns 62.5
percent of the common shares of SSI and the Company owns 37.5 percent. TFX is
contributing to SSI initial operating and project capital and the Company is
contributing to SSI personnel and know-how including its proprietary Steritrack
system for tracking instruments in hospitals. In September, 1997, SSI entered
into its first multi-year contract to provide total management of a Hospital's
sterile processing functions.
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The Company was founded in May 1982 as a New York corporation. Its
principal executive offices are located at 225 Underhill Boulevard, Syosset, New
York 11791, and its telephone number is (516) 496-8822.
Statements in this Form 10-KSB which are not historical facts, so-called
"forward-looking statements", are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed herein and in the Company's other filings with the Securities and
Exchange Commission. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Certain Factors That May Affect
Future Results".
Sterilization Services for Healthcare Providers
MSI provides off-site cleaning, decontamination and sterilization
processing of the Company's standard containerized reprocessable sterilized
surgical Instrument Sets as well as Sterilizable Items for healthcare providers
such as hospitals and ambulatory surgi-centers within the Northeast Corridor. As
of March 20, 1998, MSI had 21 contracts with healthcare providers in its area of
operations to provide its instrument services for labor and delivery; 22
contracts to provide its instrument services for operating rooms; 3 contracts to
provide laparoscopic instruments; 9 contracts to provide basins; 6 contracts to
provide gowns and/or towels; 2 contracts to provide its instrument services for
open heart and vascular surgery; 4 contracts to provide instrument services for
ambulatory surgery; 3 contracts to provide EtO processing for instruments which
could not be sterilized in a steam sterilizer; and 1 contract to provide
training and consulting of employees in the central sterilizing unit in a
hospital. The value of contracts to be implemented through the year 2003 is
approximately $20,227,000, as of March 20, 1998. The Company estimates that
there are approximately 250 such healthcare providers in the Northeast Corridor.
Sterilizable Items consist of Instrument Sets, utensils, basins, towels,
surgical gowns and wraps and other items used in healthcare facilities which
require sterilization. Instrument Sets are prepackaged, sterilized,
reprocessable instrument sets, each of which is a complete set of instruments
necessary for a given medical procedure. The Company has designed approximately
85 different Instrument Sets for operating room procedures and labor and
delivery, including gall bladder, tonsillectomy and adenoidectomy, open heart,
vascular, orthopedic, endoscopy, cesarean sections, newborn delivery,
hysterectomy and dilation and curettage. MSI packages its Instrument Sets in
rigid containers with filters and seals, thereby maintaining sterile integrity
without the risk of tearing and pinholes which occur in more traditional
wrappers. The Instrument Sets aid in the organization of the instruments for
ease of use and provide for better instrument accountability once the procedure
is completed. Once an Instrument Set has been utilized, it is returned to the
Company for cleaning, sterilization and repackaging.
The Company's services are designed to replace or supplement the existing
in-house sterilization facilities of healthcare providers. Many hospitals have
older, less efficient sterilization facilities, staff their facilities with
nurses whose skills could be more effectively used elsewhere and underutilize
their sterilization facilities by operating their equipment only once per day.
Because of the relatively low volume of sterilization activities undertaken at
many of these facilities, worker productivity may not be as high as in other
areas of the healthcare organization,
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causing concern for administrators. In addition, as hospitals continue to
evaluate ways in which to utilize their available space better, many hospitals
are seeking to replace their in-house sterilization facilities with profit
generating centers such as operating rooms. Many hospitals are also looking for
ways in which to improve operating room efficiency by eliminating the
sterilization processing delays and shortages sometimes experienced with their
in-house sterilization facilities.
By utilizing state of the art, industrial size equipment, modern
sterilization technology, less expensive labor, and handling larger volumes, the
Company believes that it offers a cost- effective, high quality alternative to
in-house sterilization facilities. The Company has installed modern, industrial
size sterilization equipment at its Syosset facility, including an ultrasonic
cleaning system, two tunnel washers, two 300 cubic foot steam sterilizers and
two 8 cubic foot EtO sterilizers.
The Company believes that it offers better sterility assurance levels than
those maintained at many hospitals. In order to comply with the infection
control requirements of the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"), the Center for Disease Control ("CDC"), the Association
for Advancement of Medical Instrumentation ("AAMI"), the Association of
Operating Room Nurses ("AORN"), the policies and procedures of each respective
hospital as well as the requirements of federal, state and local government
agencies, the Company has established rigorous testing measures and procedures,
such as sterilization process monitors (including temperature and pressure
recording), chemical indicators and bacteriological spore and culture testing.
The Company is a registered contract sterilization facility with the U.S. Food
and Drug Administration ("FDA"), even though neither the Company's activities in
this area nor hospital sterilization facilities are required to be so
registered. See "Government Regulation."
Contract Sterilization of Disposable Medical Products
During 1997, MSI provided contract steam, EtO and radiation sterilization
services to manufacturers of disposable medical products. The Company sterilized
disposable medical products such as adhesive and gauze bandages, lap sponges,
absorbent cotton balls, tracheotomy kits, trauma dressings, operating room
drapes, surgical gloves, in vitro diagnostic kits and laboratory ware, such as
pipettes, petri dishes, flasks, roller bottles and tissue culture wells. As of
December 31, 1997, the Company's customers in this area included 39 disposable
medical products manufacturers such as Busse Hospital Disposables, Elkay
Products, Inc. and Hermitage Hospital Supply Corp. located within a 300 mile
radius of its Syosset, New York facility.
As heretofore stated, the Company's Board of Directors determined that it
was in the best interests of the Company's shareholders that the Company focus
on its core Instrument Set sterilization processing business. Therefore, the
Company entered into an agreement as of March 17, 1997 to sell its Accelerator
for the approximate sum of $1,250,000 to Shamrock with transfer of title to
occur no later than April 30, 1998. The Company's licenses to operate the
Accelerator were extended to April 30, 1998. In view of the sale of the
accelerator to Shamrock in 1997, the Company evaluated opportunities to maximize
the value of its electron beam related businesses,
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including its contract sterilization of disposable medical products unit and its
radiation processing of industrial products unit. As a result, as of April 9,
1997, the Company entered into a joint marketing program with E-BEAM to provide
stability for its remaining contract sterilization and industrial processing
business. The agreement provided for the transfer of the Company's contract
sterilization and industrial processing customers to E-BEAM at a price of 15% of
related revenues up to $350,000. Upon execution of the agreement the Company
received a nonrefundable down payment against future commissions of $150,000.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition."
Radiation Processing of Industrial Products
During 1997 MSI performed radiation processing services for 15 industrial
products manufacturers whose products included fabricated plastic objects,
gaskets, tubing and plastic sheet and film. The Company's Accelerator was used
to link chemically a long string of molecules of polyethylene and
polyvinylchloride, to treat crude rubber to achieve bonding and hardening and to
link undivided chemical compounds into a larger chemical entity. See the
previous paragraph regarding the proposed joint marketing agreement with E-BEAM.
In 1997 the Company's primary radiation processing activity was the
irradiation of PTFE. Once processed, the PTFE can be ground into very small
particles for use primarily as an additive for printing inks and as a lubricant.
The Company processed PTFE for Shamrock and Precision Micron Powers, Inc.
("Precision"), a distributor of PTFE owned by Shamrock, pursuant to a Toll
Processing Agreement, as amended on March 17, 1997. Pursuant to the Toll
Processing Agreement, as amended, MSI processed PTFE only for Precision and
Shamrock, and Precision and Shamrock agreed to use certain minimum levels of
processing services through December 31, 1997. Revenues from such services were
approximately $3,040,000 in 1997.
Competition
The Company's principal competition with respect to its sterilization
services for healthcare providers comes from the in-house sterilization
facilities of hospitals and ambulatory surgi-centers. Most hospitals have
in-house sterilization capability and many have invested significant capital in
their sterilization facilities. Also, the in-house sterilization facility staff
may be committed to maintaining the facility and its current staffing levels. As
a result, healthcare providers may be reluctant to shift their sterilization
activities from in-house to an off-site contractor. Furthermore, some hospitals
have union agreements that preclude or mitigate a hospital's ability to
outsource. In today's managed care driven, consolidating environment, hospitals
and hospital networks are renegotiating these agreements with yet to be
determined success.
MSI has no competitor operating in an off-site environment which can
replicate MSI's sterilization services program though variations of the MSI
model potentially exist and/or have been announced in traditional hospital
purchasing news. Sterile Recoveries, Inc., Sterilization Management Group and
Angelica Corp. now compete with the Company in processing gowns,
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linens and basins but their operating facilities are all outside the Northeast
Corridor. Substantial know-how and capital intensive barriers could limit
competitive interest. Furthermore, the Company's proprietary hospital tracking
software system gives it a competitive advantage.
Several small and large companies are specializing in on-site instrument
processing, consulting and management services, providing hospitals and hospital
networks a competitive choice between MSI's off-site instrument processing and
sterilization services. A wholly owned subsidiary of Teleflex, Endoscopic
Specialties Inc. (ESI), specializes in on-site instrument processing. However,
as previously stated MSI and TFX jointly formed SSI to provide instrument
reprocessing in North America and SSI, MSI and ESI have joined to provide a
total instrument management solution for individual hospitals and hospital
networks throughout North America.
Customers
The Company sells its sterilization services to healthcare providers such
as hospitals and ambulatory surgi-centers in the Northeast Corridor. As of March
20, 1998, the Company provided Instrument Sets and sterilization services for
Sterilizable Items pursuant to 71 sterilization services contracts with 43
hospitals and ambulatory surgi-centers. With respect to contract sterilization
services for disposable medical products manufacturers, in 1997 the Company
provided contract sterilization services to 39 disposable medical products
manufacturers. In 1997, the Company processed industrial products for 15
industrial companies principally in the Northeastern United States. For the
fiscal year ended December 31, 1997, sales to Precision and Shamrock amounted to
approximately $3,040,000 and accounted for substantially all of the Company's
revenues from industrial product radiation processing services and 30.8% of the
Company's total revenues. No other single customer accounted for 10% or more of
the Company's total revenues for the fiscal year ended December 31, 1997. The
cessation of contract sterilization of disposable medical products and
processing of industrial products including PTFE in 1998 could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company believes that any adverse effect may be offset by
reductions in selling, general and administrative costs related to such
discontinued services, rentals to be received from subleasing the space used in
providing these services and the anticipated increase in the sterilization
services for healthcare providers as a result of the Company's focus on such
core activities.
Suppliers
The Company purchases from surgical instrument manufacturers the surgical
instruments included in Instrument Sets that are provided to hospitals and
ambulatory surgi-centers. The Company believes that such instruments are readily
available at market prices.
Sales and Marketing
MSI's sales and marketing strategy is to grow existing accounts by service
expansion: for example, if the Company is serving the labor and delivery
department of a hospital it will attempt to leverage its services into the
general operating room of the hospital after a period of
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successful product performance in the labor and delivery area. The Company has
expanded its portfolio of reprocessing services to include new service offerings
such as consulting, on-site management services and EtO sterilization. The
Company's sales and marketing efforts are coordinated by sales professionals
with appropriate clinical and hospital expertise.
Furthermore, the Company entered into a joint venture with TFX to form SSI
to sell decontamination, reprocessing and sterilizing services in select highly
populated urban centers in North America and is cooperating with SSI to market
management services in the Northeast Corridor.
Intellectual Property
The Company does not rely on any patents for the conduct of its business.
The Company does rely upon the know-how of its employees and has executed
non-disclosure and non-competition agreements with its employees. The Company
relies in significant part upon its hospital tracking software which allows the
Company to monitor and control the levels of Instrument Sets and Sterilizable
Items on-site with a given customer and to plan and control sterilization
activities. The Company's hospital tracking software was purchased from its
developer and the copyrights were assigned to the Company. Although the Company
believes that it has all necessary ownership and copyright rights in its
hospital tracking software and that this software does not infringe upon the
intellectual property rights of third parties, any determination to the contrary
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Government Regulation
The Company has obtained a license from the New York State Department of
Environmental Conservation operating through the Nassau County Department of
Health to operate its radiation sterilization and processing facility. This
license is currently in force and will remain in force until April 30, 1998. The
Company believes it is in material compliance with applicable laws and
regulations with respect to its radiation sterilization and processing facility.
The Company believes that it is in material compliance with the regulations of
the Nassau County Department of Public Works with regard to the disposition of
effluents.
The Company is registered with the Department of Health and Human
Services, Public Health Service of the FDA, and believes it is in material
compliance with the FDA compliance program with regard to the industrial
sterilization of medical devices. With regard to the reprocessing of instrument
sets for hospitals, the Company complies with FDA's program even though, for
these purposes, a hospital (and the Company, by extension) is not considered to
be a manufacturer of medical devices and is, therefore, not subject to the FDA
regulations.
The Company is also subject to the requirements of the Occupational Safety
and Health Administration ("OSHA") and believes that it is in material
compliance with such requirements. The Company believes that it is in material
compliance with all other applicable federal, state and local rules and
regulations relating to the conduct of its business.
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Employees
As of December 31, 1997, the Company had 93 full-time and 27 part-time
employees. As of January 1, 1998, 7 employees were terminated and before January
31, 1998 an additional 10 employees were terminated as a result of the cessation
of the radiation processing of PTFE. Management believes its relations with its
employees are good. None of its employees are covered by any collective
bargaining agreement.
Item 2. Description of Property
The Company's headquarters, including its executive offices, sterilization
facility and radiation processing facility, occupy approximately 103,000 square
feet of leased space in a building located at 225 Underhill Boulevard, Syosset,
New York. The Company originally entered into its headquarters lease on March 1,
1984. On November 20, 1995, the Company executed a new lease for its
headquarters which provides for a term of March 1, 1996 through February 28,
2001 with an annual rent of $456,000 for the first three years and $504,000 for
the next two years. The Company and its Landlord are negotiating an extension of
the lease to 2011 at increased rentals and the Company is also negotiating a
sublease through 2011 for 50,000 square feet of its premises at annual rentals
plus other reimbursements of approximately $300,000.
The Company believes that its facilities and equipment are in good
condition and are suitable for its operations as presently conducted and for its
foreseeable future operations. The Company currently believes that additional
facilities and equipment can be acquired if necessary, although there can be no
assurance that additional facilities and equipment will be available upon
reasonable or acceptable terms, if at all.
Item 3. Legal Proceedings
In management's opinion, there are no pending claims or litigation, the
adverse determination of which would have a material adverse effect on the
financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted for a vote of security-holders during the
Company's fiscal quarter ended December 31, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock, $.01 par value per share, has been traded in
the over-the-counter market (under the symbol "MSTI") since September 26, 1983
and is now quoted on the Nasdaq Bulletin Board. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not necessarily represent actual transactions. The approximate number of record
holders of the Company's Common Stock as of March 20, 1998 was 278.
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The following table sets forth the high and low bid prices for a share of the
Company's Common Stock as reported on the Nasdaq Bulletin Board for each fiscal
quarter in the last two fiscal years and for the first fiscal quarter of 1998
(through March 20, 1998):
1998 High Bid Low Bid
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First Quarter (through March 20, 1998) $1.313 $0.875
1997
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Fourth Quarter 1.375 0.875
Third Quarter 1.688 1.000
Second Quarter 1.688 1.000
First Quarter 2.625 1.188
1996
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Fourth Quarter 2.625 1.000
Third Quarter 1.375 1.375
Second Quarter 3.000 0.938
First Quarter 1.563 0.938
The Company has never paid cash dividends with respect to its shares of
Common Stock. The Company currently intends to retain earnings, if any, for use
in its business and does not anticipate paying cash dividends on its shares of
Common Stock in the foreseeable future. The Company is required to pay dividends
at the rate of 8% per annum per share with respect to the outstanding shares of
Series B Convertible Preferred Stock. At the option of the Company, the
dividends may be paid in cash or accrued. If accrued, the dividends shall be
added to the face amount of the Series B Convertible Preferred at the time of
conversion. In addition, certain of the Company's financing agreements and the
terms of the Company's outstanding Series B Convertible Preferred Stock and the
Series C Convertible Preferred Stock prohibit the payment of dividends on the
shares of Common Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company reported net income of approximately $613,000 in the year
ended December 31, 1997 compared to a net loss of approximately $995,000 in the
year ended December 31, 1996. The increase in net income was mainly the result
of a record influx of newly contracted hospital business during 1997, improved
control of operating and selling, general and administrative expenses, and the
absence of prior year bad debt losses and one-time costs related to legal
expenses, as well as, the one-time charge of $103,000 to reflect the reduction
of the value of the E-Beam Accelerator that was contracted to be sold to
Shamrock in 1997. The Company was also able to reduce its selling, general and
administrative costs related to certain national marketing expenses, by forming
SSI, the new joint venture company with TFX. TFX acquired all of the Company's
outstanding Convertible Preferred Stock in 1997, and now holds approximately 48%
of voting stock in the Company. Another Teleflex subsidiary,
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ESI, which owns and manages endoscopic and specialized instrumentation and
provides on-site processing services, will also join with the Company and SSI to
provide a total instrument management solution for individual hospitals and
hospital networks throughout North America.
Under the agreement with TFX, the Company will remain as an independent
public entity, whose territory will encompass the Northeast Corridor. 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 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 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.
For the fiscal year ended December 31, 1997, the Company's sterilization
services for healthcare providers, contract sterilization of disposable medical
products and radiation processing of industrial products businesses accounted
for approximately 58.8%, 10.4% and 30.8%, respectively, of the Company's
revenues, as compared with 55.1%, 11.0% and 33.9%, respectively, for the fiscal
year ended December 31, 1996. The Company's Board of Directors has determined
that it is in the best interests of the Company's shareholders that the Company
focus on its core Instrument Set sterilization processing business. Accordingly,
it has contracted to sell its Accelerator system to Shamrock and has entered
into a joint marketing agreement with E-BEAM. Under the Agreement with Shamrock
the Company will receive approximately $1,250,000 for the Accelerator and
related equipment with a Closing Date of no later than April 30, 1998 at which
time title to the beam would be transferred to Shamrock. Shamrock has posted a
$500,000 standby letter of credit in escrow in consideration therefor.
In January, 1997, the Company entered into a loan agreement with TFX. The
principal amount of the loan is $500,000 and bears interest at the rate of prime
plus 1%. The balance of the loan at December 31, 1997, was $400,000. Monthly
installment payments in increments of $50,000 are due the beginning of 1998,
with the entire balance of principal and interest unpaid due and payable on May
8, 1998.
In January, 1997, the Company issued 150,000 shares of its common stock to
TFX in settlement of $300,000 of accounts payable due to Pilling Weck, a
subsidiary of Teleflex.
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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
commissions earned at up to 15 percent of related revenues from January 1, 1998
to December 31, 2000. Upon execution of the agreement, the Company received a
nonrefundable deposit of $150,000.
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 and was
drawn down to purchase instruments for inventory and was classified as a capital
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.
In October, 1997, the Company extended and modified 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 total cost of funds was also reduced
through a reduction in the interest rate on the facility from the prime rate
plus 3.5% to prime plus 2%, and a reduction in the facility fee from 1% to 1/2%
of the loan balance per annum. See Note 6 to the Financial Statements.
Results of Operations
1997 Compared with 1996
Revenues
Revenues for the year ended December 31, 1997 increased approximately
14.7% to $9,890,000 from approximately $8,626,000 for the year ended December
31, 1996. The increase in revenues was attributable to an approximate $1,081,000
or 22.8% increase in total revenues related to the Company's sterilization
services to healthcare providers, an approximate $110,000 or 3.7% increase in
total revenues related to the Company's radiation processing of industrial
products services and an approximate $73,000 or 7.6% increase in total revenues
related to the Company's contract sterilization services. The increase in total
revenues related to the Company's sterilization services to healthcare providers
was attributable to market penetration of new customers and expanded services to
the Company's existing customer base. During 1997, the Company signed several
new multi-year contracts with major healthcare providers in the region. The
increase in radiation revenues was primarily attributable to the acceleration of
Teflon processing related to the impending termination of these services. The
increase in contract revenues, in turn, was mainly attributed to renegotiated
rates with certain key customers to more accurately reflect the service provided
by the Company.
Other Income
In April 1997, the Company received $150,000 in connection with the sale
of its contract sterilization services to E-BEAM, which is nonrefundable. This
receipt has been reported as other income.
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Gross Profit
Gross profit (revenues minus operating expenses) increased approximately
$1,017,000 or 35.2% from approximately $2,887,000 in the year ended December 31,
1996 to approximately $3,904,000 in the year ended December 31, 1997. Gross
profit as a percentage of revenues increased approximately 6.0% from 33.5% in
the year ended December 31, 1996 to 39.5% in the year ended December 31, 1997.
The increase in the Company's gross profit was attributable to improved
production efficiencies in the Company's facility and the flow on benefits from
increased sales volumes. The major components of these efficiencies were a
reduction in labor as a percentage of revenues and a reduction in supplies used
in production offset by other increases related to new volume.
Distribution Costs
Distribution costs increased approximately $72,000 or 15.2% from
approximately $471,000 in the year ended December 31, 1996 to approximately
$543,000 in the year ended December 31, 1997. As a percentage of revenues,
distribution costs remained relatively the same over the prior year at 5.5%. The
increase is primarily the result of increased sales volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately
$101,000 from approximately $2,442,000 in the year ended December 31, 1996 to
approximately $2,341,000 in the year ended December 31, 1997. As a percentage of
revenues, selling, general and administrative expenses decreased from 28.3% in
the year ended December 31, 1996 to 23.7% in the year ended December 31, 1997.
The decrease is attributed 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.
Bad Debt Expense
Bad debt expense decreased by approximately $499,000 from approximately
$560,000 in the year ended December 31, 1996 to approximately $61,000 in the
year ended December 31, 1997. The decrease is attributed to write-offs and
adjustments made in 1996 related to a receivable from a customer in bankruptcy
and the settlement of amounts in dispute. The Company has determined that its
allowance for doubtful accounts is sufficient to cover the receivables from its
hospital operations.
Write Down of Assets
The decrease of approximately $103,000 is related to the charge taken in
1996 to reflect the reduction in the value of assets associated with the sale of
the electron beam Accelerator. In March 1997, the Company entered into a sales
agreement to sell the Accelerator to Shamrock.
12
<PAGE>
Interest Expense
Interest expense increased by approximately $179,000 from approximately
$307,000 for the year ended December 31, 1996 to approximately $486,000 for the
year ended December 31, 1997. The increase is directly attributed to the
increased interest charges incurred in financing the purchase of surgical
instruments and other equipment and the additional borrowing of $500,000 from
TFX.
Net Income
Net income for the year ended December 31, 1997 was approximately
$613,000, an increase of 161.6% from a net loss of approximately ($995,000) in
the year ended December 31, 1996.
Net Income (Loss) Applicable to Common Shareholders
Diluted earnings per share for the year ended December 31, 1997 were
approximately $0.09, a 124.3% increase from the net loss per share of
approximately ($0.37) for the year ended December 31, 1996. Basic earnings per
share for the year ended December 31, 1997 were $0.16, an increase of 143.2%
from ($0.37) in basic earnings per share for the year ended December 31, 1996.
Excluding the effect of preferred dividends, earnings per share for the year
ended December 31, 1997 were $0.11, an increase of 133.3% from ($0.33) in
earnings per share before the effect of preferred dividends for the year ended
December 31, 1996.
Results of Operations
1996 Compared with 1995
Revenues
Revenues for the year ended December 31, 1996 decreased approximately 1.7%
to approximately $8,626,000 from approximately $8,772,000 for the year ended
December 31, 1995. The decrease in revenues was attributable to an approximate
$18,000 increase in total revenues related to the Company's sterilization
services to healthcare providers and an approximate $225,000 or 8.3% increase in
total revenues related to the Company's radiation processing of industrial
products services, offset by an approximate $389,000 or 28.9% decrease in total
revenues related to the Company's contract sterilization services. The increase
in radiation processing revenues was primarily attributable to increased
business under the Company's toll processing agreement with Shamrock. The
decrease in the contract sterilization business was due primarily to the loss of
the Company's largest customer which moved its business out of the Company's
area of operation.
13
<PAGE>
Gross Profit
Gross profit (revenues minus operating expenses) increased approximately
$161,000 or 5.9% from approximately $2,726,000 in the year ended December 31,
1995 to approximately $2,887,000 in the year ended December 31, 1996. Gross
profit as a percentage of revenues increased approximately 2.4% from 31.1% in
the year ended December 31, 1995 to 33.5% in the year ended December 31, 1996.
The increase in the Company's gross profit was attributable to improved
production efficiencies in the Company's facility. The major components of these
efficiencies were a reduction in labor as a percentage of revenues and a
reduction in supplies used in production.
Distribution Costs
Distribution costs increased approximately $94,000 or 25.0% from
approximately $377,000 in the year ended December 31, 1995 to approximately
$471,000 in the year ended December 31, 1996. The increase is primarily the
result of higher wages for drivers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately
$654,000 from approximately $1,788,000 in the year ended December 31, 1995 to
approximately $2,442,000 in the year ended December 31, 1996. As a percentage of
revenues, selling, general and administrative expenses increased from 20.4% in
the year ended December 31, 1995 to 28.3% in the year ended December 31, 1996.
The major portion of the increase was the result of the Company making a
significant investment in its national sales and marketing areas. The Company
strengthened these areas as it prepared to expand from a Regional Company to a
National Company. In addition the Company had above normal historical levels of
legal expenses from its new legal counsel and additional one time termination
expenses incurred as result of the elimination of an Officer's position. Also,
the Company added a full-time Chief Executive Officer to direct the
nationalization and other growth programs. The former Chief Executive Officer
and Chairman of the Board of Directors now functions solely as Chairman
providing consulting services at 50.0% of his former salary.
Bad Debt Expense
Bad debt expense increased by approximately $526,000 from $34,000 in 1995
to $560,000 in 1996. This increase is due to write-offs and adjustments of
$307,000 in 1996 and an increase in the allowance for doubtful accounts of
$219,000. The increase in write-offs and adjustments is due to the write-off of
a receivable from a customer in bankruptcy and the settlement of amounts in
dispute. The increase in the allowance for doubtful accounts relates to
receivables from certain hospitals whose financial condition has deteriorated.
14
<PAGE>
Write Down of Assets
In March 1997, the Company entered into a sales agreement to sell its
electron beam Accelerator to Shamrock Technologies, Inc. The title to the
Accelerator will pass to the purchaser no later than April 30, 1998, which is
after the end of the current Toll Processing Agreement. The sales price of the
Accelerator was approximately $1,250,000. The Company has charged $103,000 to
its operations to reflect the reduction of the value of the related assets being
sold.
Interest Expense
Interest expense decreased by approximately $28,000 from approximately
$335,000 for the year ended December 31, 1995 to approximately $307,000 for the
year ended December 31, 1996.
Net Loss
The Company incurred a net loss of approximately ($995,000) in the year
ended December 31, 1996 compared to net income of approximately $192,000 in the
year ended December 31, 1995. The net loss was mainly the result of costs
incurred to implement its National Sales Program, providing additional reserves
for bad debt losses and costs incurred related to above normal historical levels
of legal expenses from its new legal counsel and additional one time termination
expenses incurred as a result of the elimination of an Officer's position. Also,
the Company added a full-time Chief Executive Officer to direct the
nationalization and other growth programs. The former Chief Executive Officer
and Chairman of the Board of Directors now functions solely as Chairman
providing consulting services at 50% of his former salary.
Net Income (Loss) Applicable to Common Shareholders
Diluted earnings per share for the year ended December 31, 1996 were
approximately ($0.37), a decrease of $0.39 from the net earnings per share of
$0.02 for the year ended December 31, 1995. Basic earnings per share for the
year ended December 31, 1996 were ($0.37), a decrease of $0.40 from $0.03 in
basic earnings per share for the year ended December 31, 1995. Excluding the
effect of preferred dividends, earnings per share for the year ended December
31, 1996 were ($0.33), a decrease of $0.39 from $0.06 in earnings per share
before the effect of preferred dividends for the year ended December 31, 1995.
Liquidity and Capital Resources
Current assets have increased approximately $1,206,000 to approximately
$3,849,000 at December 31, 1997 from approximately $2,643,000 at December 31,
1996. The increase was primarily attributable to the classification of
$1,250,000 as current assets held for sale in connection with the sale of the
E-Beam accelerator, an approximate $68,000 increase in prepaid expenses, offset
by an approximate $43,000 decrease in cash, an approximate $18,000 decrease in
net accounts receivable and an approximate $51,000 decrease in inventory.
15
<PAGE>
The Company had working capital of approximately $1,530,000 at December
31, 1997, compared to working capital of approximately $292,000 at December 31,
1996. The Company's current ratio at December 31, 1997, was 1.66 to 1 compared
to a current ratio of 1.12 to 1 at December 31, 1996. The increase in the
Company's working capital and current ratio at December 31, 1997 compared to
December 31, 1996 was primarily the result of the classification of $1,250,000
as current assets held for sale in connection with the sale of the E-Beam
accelerator, the Company's net income for the year and improved cash flow which
was primarily used to reduce current liabilities.
The Company currently plans to expand its business by increasing its
portfolio of reprocessing services to include new service offerings such as
consulting, on-site management services and EtO sterilization. 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 and
the completion of the sale of the electron beam accelerator in April, 1998, will
be sufficient to meet working capital requirements during 1998. There can be no
assurance, however, that the Company will not require additional working capital
and, if it does require such capital, that such capital will be available to the
Company on acceptable terms, if at all.
Capital expenditures totaled approximately $2,239,000 in 1997 as compared
with approximately $850,000 in 1996. The increase in expenditures was
principally driven by purchases of surgical instruments and containers financed
under a new $1.5 million lease arrangement (See Note 7 to the Financial
Statements). These purchases were primarily made to support the Company's supply
obligations under new contracts entered into during 1997.
Management plans to purchase additional surgical instruments, as and if
required to support the Company's contract sterilization growth objectives. Cash
flows from operating activities will provide support for these expenditures,
however, additional external financing may also be required. There can be no
assurance, however, that the Company will not require additional working capital
and, if it does require such capital, that such capital will be available to the
Company on acceptable terms, if at all.
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.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities
Exchange Commission (including this Form 10-KSB) may contain statements which
are not historical facts, so-called "forward-looking statements," which involve
risks and uncertainties. Forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995;
in particular, statements made above in "Item 2. Description of Property"
relating to the suitability of the Company's facilities and equipment for future
operations and the availability of additional facilities and equipment in the
future. Relating to the sufficiency of funds for the Company's working capital
requirements during 1998, the Company's expectation
16
<PAGE>
that future cash flow will continue to be provided from operations and the
Company's not presently anticipating that inflation will have any significant
impact on its business may be forward-looking statements. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed below. Each of these factors, and others, are
discussed from time to time in the Company's filings with the Securities and
Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company has operated at a loss or a very small profit for its
entire history and there can be no assurance of its ever achieving consistent
profitability. The Company may require additional working capital in the future
and there can be no assurance that such working capital will be on acceptable
terms, if at all. The failure of the Company to continue to compete effectively
with existing or new competitors could result in price erosion, decreased
margins and decreased revenues, any or all of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company historically has relied on a relatively small number of
customers, including Shamrock and Precision, for a large percentage of its total
revenues. The termination of the Toll Processing Agreement on December 31, 1997
could have a material adverse effect on the Company's results of operations
after 1997. The Company's healthcare provider customers are concentrated in the
Northeast Corridor. Any factors affecting this market generally could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company is subject to government regulation in certain
aspects of its operations. Changes in such regulations could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company's future success will depend in part on its ability to
convince hospitals and other healthcare providers to utilize the Company's
off-site sterilization services as opposed to their own on-site facilities.
Hospitals may resist this change for a number of reasons, including the
preferences of hospital staffs which may wish to preserve their existing
staffing, labor unions which may resist any staffing reductions and the ongoing
consolidation of hospitals which may impact the willingness of hospital
administrators to make operational decisions on a timely basis and which may
affect a hospital's decision to utilize an off-site processor as opposed to
retaining one or more of the consolidated hospital group's central sterilization
facilities to provide services for the entire group. The Company relies upon the
know-how of its employees and upon its hospital tracking software to efficiently
conduct its business. Any invalidation of these intellectual property rights or
lengthy and expensive defense of these rights could have a material adverse
effect on the Company.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect revenues and
profitability, including: competitive pressures on selling prices and margins;
the timing and cancellation of customer orders; the lengthy sales cycle of the
Company's sterilization services to healthcare organizations; the Company's
ability to maintain state-of-the-art sterilization facilities and the
corresponding timing and amount of capital expenditures, particularly if the
Company executes its plan for expansion; and the introduction of new services by
the Company's competitors. As a result of the foregoing and other factors, the
Company may experience material fluctuations in future operating results on a
quarterly or annual basis which could materially and adversely effect its
business, operating results and stock price.
17
<PAGE>
Other Matters
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date sensitive information by the Company's
computerized information systems. The potential impacts on key customers and
suppliers are not reasonably estimable at this time. Certain computer programs
have been written using two digits rather than four to define a year which
could, for example, result in a computer system incorrectly recognizing the year
2000 as the year 1900. Costs of resolving the "year 2000" problem are not
currently expected to have a material adverse impact on financial position or
results of operations.
Item 7. Financial Statements
For the following financial information required by this Item, see Index
on Page F-1.
Item 8. Changes in and Disagreements With Accountants and Accounting and
Financial Disclosure
On October 1, 1997, the Company's accountants, Coopers & Lybrand L.L.P.
advised the Company that the client-auditor relationship had ceased due to their
resignation. On October 27, 1997, the Company engaged Price Waterhouse LLP as
its independent accountants for the year ended December 31, 1997. There were no
disagreements with either Coopers & Lybrand L.L.P. or Price Waterhouse LLP on
any matter of accounting principles or practices or financial statement
disclosure required to be reported under this Item.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information required by this Item is incorporated herein by reference
to the information in the sections entitled "Proposal Relating to Election of
Directors," "Occupations of Directors and Executive Officers," and "Compensation
and Other Information Concerning Directors and Officers" contained in the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the close of the fiscal year
ended December 31, 1997.
Item 10. Executive Compensation
The information required by this Item is incorporated herein by reference
to the information in the section entitled "Compensation and Other Information
Concerning Directors and Officers" contained in the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year ended December 31, 1997.
18
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference
to the information in the section entitled "Management and Principal
Shareholders" contained in the Company's definitive proxy statement to be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the fiscal year ended December 31, 1997.
Item 12. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference
to the information in the section entitled "Certain Relationships and Related
Transactions" contained in the Company's definitive proxy statement to be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the fiscal year ended December 31, 1997.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits:
(3)(1) Restated Certificate of Incorporation filed May 24, 1989 -
filed as Exhibit (3)(1) to Company's Annual Report for the fiscal year ended
December 31, 1995 on Form 10-KSB and incorporated herein by reference.
(3)(2) Certificate of Amendment of Certificate of Incorporation
filed January 4, 1990 - filed as Exhibit (3)(2) to Company's Annual Report for
the fiscal year ended December 31, 1995 on Form 10-KSB and incorporated herein
by reference.
(3)(3) Certificate of Amendment of Certificate of Incorporation
filed November 25, 1994 - filed as Exhibit (3)(3) to Annual Report for the year
ended December 31, 1995 on Form 10-KSB and incorporated herein by reference.
(3)(4) Certificate of Amendment of Certificate of Incorporation
filed June 17, 1996 - filed as Exhibit (3)(4) to Annual Report for the year
ended December 31, 1996 on Form 10-KSB and incorporated herein by reference.
(3)(5) Certificate of Amendment of Certificate of Incorporation
filed January 6, 1997 - filed as Exhibit (3)(5) to Annual Report for the year
ended December 31, 1996 on Form 10-KSB and incorporated herein by reference.
(3)(6) Certificate of Correction of Certificate of Amendment of
Certificate of Incorporation filed January 10, 1997 - filed as Exhibit (3)(6) to
Annual Report for the year ended December 31, 1996 on Form 10-KSB and
incorporated herein by reference.
(3)(7) Amended and Restated By-Laws dated June 2, 1987 filed as
Exhibit (3)(4) to Annual Report for the year ended December 31, 1995 on Form
10-KSB and incorporated herein by reference.
(10)(1) 1994 Stock Option Plan - filed as Exhibit (10)(a)(1) to
Annual Report for the year ended December 31, 1993 on Form 10-K and incorporated
herein by reference.
19
<PAGE>
(10)(2) 1996 Stock Option Plan - filed as Exhibit (10)(2) to the
Annual Report for the year ended December 31, 1995 on Form 10-KSB and
incorporated herein by reference.
(10)(3) Agreement with Mercy Hospital dated November 14, 1988. This
contract is substantially similar to the other contracts entered into with
hospitals. The basic differences relate to the type of medical sets provided,
the term of the contract and the compensation. This Agreement was filed as
Exhibit (10)(c) to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-28660) and incorporated herein by reference.
(10)(4) Lease dated November 20, 1995 with Barlich Realty, Inc. -
filed as Exhibit (10)(4) to Annual Report for the year ended December 31, 1995
on Form 10-KSB and incorporated herein by reference.
(10)(5) Amendment to Toll Processing Agreement and to Agreement
Modifying and Extending Toll Processing Agreement dated March 17, 1997 filed as
Exhibit (10)(13) to Annual Report for the year ended December 31,1996 on Form
10-KSB and incorporated herein by reference.
(10)(6) Purchase and Sale Agreement dated March 17, 1997 between the
Company and Shamrock Technologies, Inc., dated March 17, 1997 - filed as Exhibit
(10)(14) to Annual Report for the year ended December 31,1996 on Form 10-KSB and
incorporated herein by reference.
(10)(7) Financing Agreement between the Company and Rosenthal &
Rosenthal, Inc., dated October 17, 1994 - filed as Exhibit (19)(o) to Annual
Report for the year ended December 31, 1993 on Form 10-K and incorporated herein
by reference.
(10)(8) Extension of Financing Agreement with Rosenthal & Rosenthal,
Inc., dated December 22, 1995 - filed as Exhibit (19)(o)(1) to Amendment No. 4
to Registration Statement on Form SB-2 (File No. 33-96330) and incorporated
herein by reference.
(10)(9) Extension of Financing Agreement with Rosenthal & Rosenthal,
Inc., dated April 29, 1996 - filed as Exhibit (10)(21) to Annual Report for the
year ended December 31, 1996 on Form 10-KSB and incorporated herein by
reference.
(10)(10) Extension and Modification of Financing Agreement with
Rosenthal & Rosenthal dated August 15, 1997.
(10)(11) Credit Line and Term Loan Agreements with Apple Bank for
Savings dated July 20, 1990 - filed as Exhibit (25) to Amendment No. 1
Registration Statement No. 33-28660 and incorporated herein by reference.
(10)(12) Letter amending Credit Line and Term Loan Agreement from
Apple Bank for Savings dated April 4, 1991 - filed as Exhibit (10)(19) to Annual
Report for the year ended December 31, 1995 on Form 10-KSB and incorporated
herein by reference.
20
<PAGE>
(10)(13) Letter confirming Term Loan Agreement from Apple Bank for
Savings dated March 24, 1992 - filed as Exhibit (25)(b) to Annual Report for the
year ended December 31, 1991 on Form 10-K and incorporated herein by reference.
(10)(14) Amendment No. 1 to Credit Agreement with Apple Bank for
Savings dated as of May 12, 1992 - filed as Exhibit (25)(c) to Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.
(10)(15) Loan Extension Agreement dated November 29, 1994 between
the Company and Apple Bank for Savings - filed as Exhibit (25)(d) to Annual
Report for the year ended December 31, 1993 on Form 10-K and incorporated herein
by reference.
(10)(16) Agreement with Dr. Kennard H. Morganstern dated February 7,
1995 - filed as Exhibit (26) to Amendment No. 1 to Form SB-2 (File No. 33-96330)
and incorporated herein by reference.
(10)(17) Letter of Intent between the Company and E-BEAM Services,
Inc. dated March 19, 1997 - filed as Exhibit (10)(29) to Annual Report for the
year ended December 31, 1996 on Form 10-KSB and incorporated herein by
reference.
(10)(18) Agreement between the Company and E-Beam dated April 9,
1997.
(10)(19) Joint Venture Agreement between the Company and TFX
Equities Incorporated, dated May 16, 1997 providing for SSI Surgical Services,
Inc. - filed as Exhibit (10)(29) to Amendment No. 1 to Form SB-2 (File No.
33-96330) and incorporated herein by reference.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-K dated October 1, 1997 and October 26, 1997 were filed
by the Company.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
March 30, 1998 MEDICAL STERILIZATION, INC.
By: /s/ D. Michael Deignan
------------------------------------------
Name: D. Michael Deignan
Title: President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report was
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name and Signature Title(s) Date
- ------------------ -------- ----
/s/ D. Michael Deignan President, Chief Executive March 30, 1998
- ------------------------- Officer and Director
D. Michael Deignan (principal executive and
principal financial officer)
/s/ Ivan M. Zubin Principal Accounting March 30, 1998
- ------------------------- Officer
Ivan M. Zubin
/s/ Larry C. Buckelew Director March 30, 1998
- -------------------------
Larry C. Buckelew
/s/ John R. Hoover Director March 30, 1998
- -------------------------
John R. Hoover
/s/ Kennard H. Morganstern Director March 30, 1998
- -------------------------
Kennard H. Morganstern
/s/ John J. Sickler Director March 30, 1998
- -------------------------
John J. Sickler
/s/ Forrest R. Whittaker Director March 30, 1998
- -------------------------
Forrest R. Whittaker
/s/ Harold L. Zuber, Jr. Director March 30, 1998
- -------------------------
Harold L. Zuber, Jr.
22
<PAGE>
SUPPLEMENTAL INFORMATION TO BE
FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE EXCHANGE
ACT BY NON-REPORTING ISSUERS
No annual report or proxy material has been sent to the Issuer's security
holders with respect to the year ended December 31, 1997. A copy of the Issuer's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 and the
Issuer's Proxy Statement for the 1998 Annual Meeting of Shareholders will be
furnished to shareholders and filed with the Securities and Exchange Commission
on or about April 24, 1998.
23
<PAGE>
MEDICAL STERILIZATION, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-2
Report of Prior Independent Accountants F-3
Balance Sheet as at December 31, 1997 F-4
Statements of Operations for the years ended December 31, 1997
and 1996 F-5
Statements of Shareholders' Equity for the years ended
December 31, 1997 and 1996 F-6
Statements of Cash Flows for the years ended December 31, 1997
and 1996 F-7
Notes to Financial Statements F-9
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Medical Sterilization, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, shareholders' equity and of cash flows listed in the index on page
F-1 of this Form 10-KSB present fairly, in all material respects, the financial
position of Medical Sterilization, Inc. at December 31, 1997 and the results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. The financial statements of
Medical Sterilization, Inc. for the year ended December 31, 1996 were audited by
other independent accountants whose report dated March 28, 1997, expressed an
unqualified opinion on those statements.
Price Waterhouse LLP
Philadelphia, Pennsylvania
March 16, 1998.
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Medical Sterilization, Inc.
We have audited the accompanying statements of operations, shareholders' equity
and cash flows of Medical Sterilization, Inc. for the year ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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. Au 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Medical
Sterilization, Inc. for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Melville, New York
March 28, 1997.
F-3
<PAGE>
MEDICAL STERILIZATION, INC.
BALANCE SHEET
December 31, 1997
-----------------
ASSETS:
Current assets:
Cash $ 32,446
Trade accounts receivable (net of allowance for
doubtful accounts of $152,539) 2,391,133
Inventory 70,603
Prepaid expenses 105,044
Assets held for sale 1,250,000
-----------
Total current assets 3,849,226
Fixed assets, net 5,179,335
Other assets 139,696
-----------
Total assets $ 9,168,257
===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 931,173
Current maturities of long-term debt 901,836
Obligation under capital leases 486,365
-----------
Total current liabilities 2,319,374
Long-term debt less current maturities 1,450,009
Obligation under capital leases 1,871,780
-----------
Total liabilities 5,641,163
-----------
Commitments and contingencies (Note 12)
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 1,777,504
-----------
Shareholders' equity:
Convertible preferred stock, par value $.01 per share:
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 7,732,984
Accumulated deficit (7,960,723)
-----------
Total shareholders' equity 1,749,590
-----------
Total liabilities and shareholders' equity $ 9,168,257
===========
F-4
<PAGE>
MEDICAL STERILIZATION, INC.
STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------
1997 1996
---- ----
Income:
- -------
Revenue $ 9,890,277 $ 8,626,482
Other Income 150,000 0
----------- -----------
10,040,277 8,626,482
----------- -----------
Costs and expenses:
- -------------------
Operating 5,986,638 5,739,192
Distribution 542,653 471,078
Selling, general and administrative 2,340,524 2,441,665
Bad debt expense 61,012 559,929
Write down of assets 0 102,709
Interest 486,076 307,351
----------- -----------
9,416,903 9,621,924
----------- -----------
Income (loss) before income taxes 623,374 (995,442)
Income taxes 10,000 0
----------- -----------
Net income (loss) 613,374 (995,442)
Preferred stock dividends (109,552) (123,552)
----------- -----------
Net income (loss) applicable to
common shareholders $ 503,822 $(1,118,994)
=========== ===========
Earnings per common share - basic $ 0.16 $ (0.37)
=========== ===========
Earnings per common share - diluted $ 0.09 $ (0.37)
=========== ===========
Weighted average common shares 3,157,996 2,991,893
=========== ===========
Weighted dilutive common shares 5,571,683 2,991,893
=========== ===========
See notes to financial statements
F-5
<PAGE>
MEDICAL STERILIZATION, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common stock Preferred stock Additional
------------ --------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 2,980,496 $29,804 1,945,625 $1,945,625 $7,688,144 $(7,578,655) $2,084,918
Accrual of preferred stock
dividends (123,552) (123,552)
Conversion of options 40,000 400 3,600 4,000
Costs incurred with stock
registration (24,156) (24,156)
Net loss for year (995,442) (995,442)
--------- ------- --------- ---------- ---------- ----------- ----------
Balance,
December 31, 1996 3,020,496 $30,204 1,945,625 $1,945,625 $7,544,036 $(8,574,097) $ 945,768
Accrual of preferred stock
dividends (109,552) (109,552)
Issuance of stock 150,000 1,500 298,500 300,000
Net income for year 613,374 613,374
--------- ------- --------- ---------- ---------- ----------- ----------
Balance,
December 31, 1997 3,170,496 $31,704 1,945,625 $1,945,625 $7,732,984 $(7,960,723) $1,749,590
========= ======= ========= ========== ========== =========== ==========
</TABLE>
See notes to financial statements
F-6
<PAGE>
MEDICAL STERILIZATION, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 613,374 $(995,442)
Adjustments to reconcile net
income (loss) to net cash
provided by
operating activities:
Depreciation and
amortization 681,741 642,123
Allowance for doubtful accounts 61,012 559,929
Write down of assets 0 102,709
Changes in assets and
liabilities:
(Increase) in receivables (43,090) (614,986)
Decrease in inventory 50,472 11,589
(Increase) decrease in prepaid expenses (67,664) 34,376
Decrease in other assets 20,723 34,910
(Decrease) increase in accounts payable
and accrued expenses (590,326) 906,129
----------- ---------
Net cash provided by
operating activities 726,242 681,337
----------- ---------
Cash flows from investing activities:
Net capital expenditures (2,238,987) (849,547)
----------- ---------
Net cash used in
investing activities (2,238,987) (849,547)
----------- ---------
See notes to financial statements
F-7
<PAGE>
MEDICAL STERILIZATION, INC.
STATEMENTS OF CASH FLOW
Years ended December 31,
--------------------------
1997 1996
---- ----
(Continued)
Cash flows from financing activities:
Net (repayments) proceeds from revolving
line of credit $ (100,976) $ 333,978
Repayments of long-term debt (413,146) (171,121)
Proceeds from issuance of debt 500,000 50,000
Net borrowings (repayments) under
capital lease obligations 1,483,610 (124,178)
Proceeds from stock options exercised 0 4,000
Costs incurred in connection with
stock registration 0 (24,156)
---------- ---------
Net cash provided by
financing activities 1,469,488 68,523
---------- ---------
Net decrease in cash (43,257) (99,687)
Cash at beginning of year 75,703 175,390
---------- ---------
Cash at end of year $ 32,446 $ 75,703
========== =========
Supplemental disclosures:
Interest payments during the years ended December 31, 1997 and 1996 were
$486,076 and $319,800, respectively
Taxes paid during the years ended December 31, 1997 and 1996 were $1,304 and
$11,774, respectively.
During 1997 and 1996, the Company accrued dividends of $109,552 and $123,552,
respectively, on Series B Preferred Stock, in accordance with the Series B
Preferred Stock agreement.
During 1997 and 1996, the Company recorded capital lease obligations of
$1,882,886 and $969,693, respectively.
See notes to financial statements
F-8
<PAGE>
MEDICAL STERILIZATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. Formation and Business:
The Company was incorporated in New York State on May 27, 1982. The
Company provides off-site sterilization services to health care providers and
through 1997 provided sterilization services to manufacturers of disposable
medical products and various industrial products, principally in the New York
metropolitan area. The Company also used its radiation facility at Syosset, New
York, to irradiate PTFE, which can then be ground into very small particles for
use primarily as an additive to printing inks and as a lubricant. The Company
leases its facility in which it has installed steam, EtO and radiation
sterilization equipment.
For the fiscal year ended December 31, 1997, the Company's sterilization
services for healthcare providers, contract sterilization of disposable medical
products and radiation processing of industrial products businesses accounted
for approximately 58.8%, 10.4% and 30.8%, respectively, of the Company's
revenues, as compared with 55.1%, 11.0% and 33.9%, respectively, for the fiscal
year ended December 31, 1996.
2. Summary of Significant Accounting Policies:
Inventory:
Inventory is stated at the lower of first-in, first-out cost or market.
Fixed Assets:
Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the related assets (ranging from 5 to 15
years) and, for leasehold improvements, over the shorter of the useful life of
the improvement or the term of the lease. Shrinkage-loss of surgical instruments
and containers is provided based upon incurred losses.
Maintenance and repairs are charged to expense in the year incurred.
Expenditures which significantly improve or extend the life of the assets are
capitalized. Upon disposal, the cost and related accumulated depreciation are
removed from the respective accounts and any resulting gain or loss is included
in income.
F-9
<PAGE>
Accounting for Long-Lived Assets:
On a periodic basis or whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset.
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. SFAS No. 128 requires presentation of both basic and diluted
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed in a similar manner except that the
weighted average number of common shares is increased for dilutive securities.
Potentially dilutive securities for the 1997 computation of diluted earnings per
share consist of options for 468,062 shares and Series C Convertible Preferred
Stock for 1,945,625 shares. Series B Preferred Stock was excluded from the 1997
calculation of diluted earnings per share since the result would be
anti-dilutive. Potentially dilutive securities have also been excluded from the
1996 computation of diluted earnings per share since the result would be
anti-dilutive.
Revenue Recognition:
The Company records revenue for hospital services monthly, in accordance
with contractual terms. Revenues for other sterilization and radiation services
are recorded upon the completion of processing and/or shipment.
Concentration of Credit Risk:
Trade receivables arise from long-term and short-term contracts with
healthcare providers in its area of operations. The Company provided instrument
sterilization services pursuant to approximately 71 sterilization services
contracts with hospitals and ambulatory surgi-centers during 1997 as compared to
approximately 53 during 1996. In addition, the Company sterilized disposable
medical products and processed industrial products for approximately 54
disposable medical products manufacturers and industrial companies during 1997
as compared to approximately 66 during 1996. Receivables also arise from the
processing of Teflon. This process is performed solely for Shamrock (See Note
13), and accounted for approximately 30.8% and 33.9% of total revenue for 1997
and 1996, respectively. To reduce credit risk, the Company performs credit
evaluations of its customers but does not generally require collateral. Credit
risk is affected by conditions within the economy and the healthcare industry.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
At December 31, 1997, six customers represented approximately 50% of the
accounts receivable balance. The loss of any one customer could have a
significant impact on the Company's financial position or results of operations.
F-10
<PAGE>
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires that deferred income taxes be recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
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,
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.
Reclassifications:
Certain items in the 1996 financial statements have been reclassified to
conform with the 1997 presentation of the financial statements.
3. Fixed Assets:
At December 31, 1997, fixed assets consists of:
Machinery and equipment $2,159,594
Leasehold improvements 546,874
Furniture and fixtures 274,771
----------
2,981,239
Less accumulated depreciation and amortization 1,491,892 1,489,347
----------
Surgical instruments 6,154,306
Containers 1,152,179
----------
7,306,485
Less accumulated depreciation and amortization 3,616,497 3,689,988
---------- ----------
$5,179,335
==========
Included in fixed assets at December 31, 1997 are assets recorded under
capital leases comprised of:
Machinery and equipment $ D606,277
Containers 335,225
Surgical instruments 1,951,255
----------
2,892,757
Less accumulated amortization 209,715
----------
$2,683,042
==========
F-11
<PAGE>
4. Employee Benefit Plans:
The Company maintains a 401(k) defined contribution plan which allows
participants to make contributions based on a percentage of their earnings. The
Company's contribution for the fiscal years ended December 31, 1997 and 1996 was
approximately $34,700 and $34,000, respectively.
5. Income Taxes:
The components of the provision for income taxes for the years ended
December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Current tax expense:
Federal $ 7,000 $ 0
State 3,000 0
------- ----
$10,000 $ 0
======= ====
Reconciliation of the federal statutory tax rate to the effective tax rate
is as follows:
1997 1996
---- ----
Expected federal statutory tax rate (benefit) 34% (34%)
State and local taxes, net 6% ( 6%)
Limitation (utilization) of net operating losses (38%) 40%
--- ---
Effective tax rate 2% 0%
=== ===
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 1997 are as
follows:
Deferred tax liability:
Depreciation $ (996,641)
-----------
Total deferred tax liability (996,641)
Deferred tax assets:
Net operating loss carryforwards 4,108,669
Other 67,505
-----------
Total deferred tax assets 4,176,174
Less valuation allowance (3,179,533)
-----------
Net deferred tax assets $ 0
===========
The Company has established a valuation allowance equal to the net
deferred tax asset amount as it is more likely than not that the deferred tax
asset will not be realized. During 1997 the Company utilized approximately
$319,000 of net operating loss carryforwards for income tax purposes. Such
utilization served to eliminate the Company's current tax liability except for
the
F-12
<PAGE>
alternative minimum tax. The net change in the total valuation allowance for the
year ended December 31, 1997 was a decrease of approximately $125,000 related
primarily to current year net operating loss carryforwards.
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $10,272,000, which expire in varying amounts from
1998 through 2012.
6. Long-Term Debt:
At December 31, 1997, long-term debt consists of:
Notepayable to officer and shareholder, payable in annual
installments of $50,000 with interest payable monthly
at the prime rate (8.50% at December 31, 1997) plus 1%(a) $ 99,741
Notepayable to bank, payable in monthly installments of
$12,500, with final balloon payment due May 1998 with
interest at the rate of 2 1/2% per annum over the prime
rate(b) 451,836
Notepayable to commercial lender, due January 2000 with
interest payable monthly at the rate of 2% per annum
over the prime rate(c) 1,400,268
Note payable to TFX, payable in installments as follows:
$50,000 on February 1, 1998 and three successive
installments of $50,000 on the same day of each succeeding
calendar month until all such payments have been made, and
on May 8, 1998, the entire balance of principal and interest
unpaid shall be due and payable, at the rate of 1% per annum
over the prime rate. 400,000
----------
2,351,845
Less, current maturities (including $450,000 due
to related parties) 901,836
----------
Long-term debt (including $49,741 due to
related parties) $1,450,009
==========
(a) Repayment terms are restricted at a rate not to exceed 10% of the
profits in any quarter and to be limited further by the Company's cash
availability. The loans are subordinate to the bank borrowing.
F-13
<PAGE>
(b) The bank holds a second lien position on the Company's assets and a
first lien on proceeds to be received from the divestiture of the Company's
electron beam accelerator (See Note 13). The weighted average interest rate for
the year ended December 31, 1997 was 11%.
(c) The agreement provides for a revolving collateralized line of credit
up to $2,000,000. The line of credit is collateralized by substantially all
assets of the Company. In October, 1997, the agreement was modified and 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 interest rate on the
facility was also changed to prime plus 2% (previously prime plus 3.5%). The
agreement prohibits the payment of dividends on the shares of Common Stock.
Average monthly borrowings under the revolving line of credit described
above for the year ended December 31, 1997 amounted to $1,630,387 and the
related weighted average interest rate was 11.9%. Maximum borrowings at any
month end were $1,903,010 in 1997.
Aggregate principal payment requirements for long-term debt are as
follows: 1998 - $901,836; 1999 - $49,741; 2000 - $1,400,268; and thereafter -
$0.
Fair value of long-term debt approximates recorded amounts as similar
borrowings have been offered to the Company at comparable rates and maturities.
7. Capital Leases:
Future minimum payments as of December 31, 1997 under capital leases for
fixed assets, including surgical instruments, are as follows:
1998 $ 682,264
1999 657,120
2000 638,349
2001 479,867
2002 386,858
----------
Total minimum lease payments $2,844,458
Less, amount representing interest 486,313
----------
Present value of minimum lease payments $2,358,145
==========
In April 1997, the Company entered into a new master lease agreement with
a bank to finance the purchase of surgical instruments and containers.
Approximately $1,500,000 was drawn under this arrangement during 1997. The lease
agreement is guaranteed by Teleflex, the parent of TFX, the Company's major
shareholder.
F-14
<PAGE>
8. Common and Preferred Stock:
On January 8, 1997, TFX, a wholly owned subsidiary of Teleflex, a
diversified publicly held company, purchased the Series B and Series C
Convertible Preferred Stock from the previous owners of such stock. In
connection with this transaction and after the resignation of three of the
incumbent Directors, three nominees of TFX, were elected to the Company's Board
of Directors.
The Series B Convertible Preferred Stock is convertible at $2.00 per share
into 687,500 shares of Common Stock. This Series B Convertible Preferred Stock
is convertible at the option of the holder into Common Stock or cash, at $2.00
per share maturing December 31, 1999. Dividends accrue on the Series B
Convertible Preferred Stock at the rate of 8% per year. These dividends may be
paid in cash or accrued at the option of the Company. If not paid, accrued
dividends are added to the face amount of the Series B Convertible Preferred
Stock at the time of conversion. In the event prior to October 31, 1999, the
market price of the Company's Common Stock as quoted on Nasdaq attains a price
of $6.00 per share and maintains such price for at least 90 days, the Series B
Convertible Preferred Stock will be automatically converted into Common Stock.
The Series C Convertible Preferred Stock is automatically convertible at
$1.00 per share into 1,945,625 shares of Common Stock on December 30, 2004, or
earlier at the option of the holder. There are no dividends payable nor accrued
on the Series C Convertible Preferred Stock. In the event prior to October 31,
1999, the market price of the Company's Common Stock as quoted on Nasdaq attains
a price of $3.00 per share and maintains such price for at least 90 days, the
Series C Convertible Preferred Stock will be automatically converted into Common
Stock.
In February 1997, the Company issued an additional 150,000 shares of its
common stock to TFX for $2.00 per share. The shares were used to reduce amounts
payable to another subsidiary of Teleflex, incurred for surgical instrument
purchases.
9. Common Stock Warrants:
From time to time, the Company has issued Common Stock warrants to
directors, lending institutions and other third parties. In January 1996, the
Company issued warrants to purchase 25,000 shares of Common Stock at $2.00 per
share to a new board member. Such warrants become exercisable as follows: 25% in
1996, 25% in 1997, 25% in 1998 and 25% in 1999. The warrants expire in 2001. No
Common Stock warrants were issued in 1997.
At December 31, 1997, the Company had aggregate warrants outstanding to
purchase 357,500 shares of Common Stock at a price of $2.00 per share with
expiration dates through January 2001.
F-15
<PAGE>
10. Stock Option Plan:
On September 29, 1994, the Board of Directors approved the 1994 Stock
Option Plan and authorized the issuance of up to 1,000,000 shares of Common
Stock of the Company upon the exercise of Incentive and Non-Qualified Stock
Options which may be granted pursuant to the Plan. The Plan was approved by the
shareholders at a meeting held on July 20, 1995. In 1996, the Board of Directors
authorized another 500,000 shares of Common Stock to be issued under the 1996
Plan which was approved by shareholders on May 25, 1996.
Incentive Stock Options may be granted only to key employees, including
officers or directors who are employees of the Company, and are exercisable
immediately or in installments following a period of two (2) years after grant
but within ten (10) years from the date of grant (five (5) years in the case of
options granted to holders of more than 10% of the Company's voting stock). The
exercise price must be at least equal to the fair market value of the Company's
Common Stock on the date granted (110% in the case of 10% shareholders). At
December 31, 1997, Incentive Stock Options for an aggregate of 536,920 shares of
Common Stock at exercise prices ranging from $.74 to $1.28 were outstanding.
Non-Qualified Stock Options may be granted under the Plans or otherwise to
officers, directors, consultants and key employees. The exercise price is not
limited and may be below the fair market value of the Company's Common Stock on
the date of grant. At December 31, 1997, Non-Qualified Stock Options for an
aggregate of 692,500 shares of Common Stock at exercise prices ranging from $.74
to $9.00, were outstanding.
The Company applies the disclosure-only provisions of SFAS 123 "Accounting
for Stock-Based Compensation," continuing to measure compensation cost in
accordance with APB 25 " Accounting for Stock Issued to Employees." Had
compensation cost been determined based on the fair value at the grant date
consistent with the provisions of SFAS 123, the Company's proforma net income
(loss) and earnings per share for the years ended December 31, 1997 and 1996
would have been:
1997 1996
---- ----
Net income (loss) attributable to common
shareholders as reported $503,822 $(1,118,994)
======== ===========
Pro forma income (loss) 368,242 (1,216,201)
======== ===========
Earnings per Common share as reported - Diluted .09 (.37)
======== ===========
Pro forma Earnings per share - Diluted .07 (.41)
======== ===========
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in 1997 and 1996, respectively; no
dividend yield; expected volatility of 90%; risk-free interest rate (ranging
from 5.00% - 6.61%); and expected lives ranging from approximately 1.5 to 5
years. Weighted averages are used because of varying assumed exercise dates.
F-16
<PAGE>
A summary of the status of the Company's stock option plans as of December 31,
1997 and 1996, and changes during the years ended on those dates is presented
below.
December 31, 1997 December 31, 1996
-------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
---------- -------- ---------- --------
Outstanding at beginning of year 1,080,920 .84 894,750 .76
Granted 148,500 1.32 227,170 1.03
Exercised 0 (40,000) .10
Canceled 0 (1,000) .74
---------- ----------
Outstanding at end of year 1,229,420 .88 1,080,920 .84
========== ==========
Options exercisable at year end 1,079,335 953,043
========== ==========
Weighted average fair value of
options granted during the year $ .91 $ .73
========== ==========
The following table summarizes information about stock options outstanding
at December 31, 1997:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
$ .74 to $ .75 891,250 7 $ .74 891,250 $ .74
$1.06 137,170 3 1.06 68,585 1.06
$1.19 50,000 2 1.19 50,000 1.19
$1.28 118,500 10 1.28 37,000 1.28
$1.50 30,000 10 1.50 30,000 1.50
$9.00 2,500 1 9.00 2,500 9.00
-------- -- ----- --------- -----
$ .74 to $9.00 1,229,420 7 $ .88 1,079,335 $ .84
11. Related Party Transactions:
As of December 31, 1997 and 1996, members of the law firm currently
serving as general counsel for the Company owned 48,057 shares of common stock.
Fees for legal services rendered by the law firm approximated $79,000 and
$20,500 for the years ended December 31, 1997 and 1996, respectively.
The Company purchases from surgical instrument manufacturers the surgical
instruments included in instrument sets that are utilized in providing the
Company's services. Pilling Weck, a national surgical instrument manufacturer
and a subsidiary of Teleflex, has agreed to supply surgical instruments to the
Company. Purchases from Pilling Weck are made on
F-17
<PAGE>
commercial terms. Instrument purchases from Pilling Weck, including instruments
financed under capital lease obligations, for the years ended December 31, 1997
and 1996 were approximately $701,000 and $753,000, respectively.
See Notes 6 and 9 for other related party transactions.
12. Commitments and Contingencies:
The Company leases its operating facility and certain equipment under
operating leases. The lease for the facility in Syosset, New York, was renewed
in November 1995, with the following terms: (a) term of the lease is five (5)
years until March 2001, (b) annual rental to be $456,000 for the first three (3)
years and $504,000 for the remaining two (2) years. In January 1998, the Company
negotiated in principle a lease extension of 13 years on its operating facility
in Syosset, New York, and signed a letter of intent to sublease approximately
50,000 square feet at market rates.
Minimum annual rental commitments for non-cancelable operating leases at
December 31, 1997, are as follows:
Year ending
December 31, Amount
------------ ------
1998 $ 641,000
1999 641,000
2000 540,000
2001 89,000
2002 0
----------
$1,911,000
==========
Rent expense was approximately $713,000 and $705,000 and for the years
ended December 31, 1997 and 1996, respectively.
13. Acquisitions and Divestitures:
In March 1997, the Company entered into a purchase and sale agreement with
Shamrock to sell the Company's electron beam accelerator. Under the agreement
the Company will receive approximately $1,250,000 for the beam and related
equipment with closing of the sale scheduled for April 30, 1998, at which time
title to the beam would transfer to Shamrock. In consideration therefor,
Shamrock has posted a $500,000 standby letter of credit in escrow. In connection
with the sale during the fourth quarter of 1996, the Company wrote down the
assets to be disposed of to the expected net cash proceeds. The related assets
are presented in the December 31, 1997 balance sheet as assets held for sale.
Revenues from the business to be divested approximated $4,100,000 in 1997 and
$3,800,000 in 1996.
F-18
<PAGE>
In April 1997, the Company entered into a joint marketing agreement with
E-BEAM providing for the transfer of the Company's remaining contract
sterilization and industrial processing customers. Consideration therefor,
included a nonrefundable payment of $150,000 received in April, 1997, which has
been included in other income in 1997 and future commission payments up to
$200,000.
In May 1997, the Company and TFX announced the formation of a joint
venture company named SSI. SSI was established to provide a total instrument
management solution, providing services to individual hospitals and hospital
networks throughout territories not covered by the Company. The Company owns
37.5 percent of the venture. The Company contributed personnel and know-how,
including its proprietary multi-hospital tracking system and a developing
customer list in select highly populated urban centers. TFX provided the initial
operating and project capital required to fund expansion into these markets. The
venture's operations did not materially impact the financial position or results
of operations of the Company during 1997.
F-19
Exhibit (10)(10)
August 15, 1997
MEDICAL STERILIZATION INC.,
225 Underhill Blvd.
Syosset NY 11791
Re: Financing Agreement
Dated: October 17, 1994
It is mutually agreed that the above mentioned agreement between us shall be
amended as hereinafter provided:
The Margin specified in the first sentence of Paragraph 3.1 is hereby amended to
read, the Prime Rate plus two percent (2%) per annum.
Paragraph 3.2 is hereby amended to read as follows:
3.2 For the contract year beginning February 1, 1998, and yearly
thereafter, Borrower shall pay to Lender an annual facility fee in the amount of
$10,000.00 in the aggregate for each contract year, payable in arrears in
monthly installments of $833.33 per month. For the period from October 1, 1997
until January 31, 1998 the monthly installments shall be 833.33 per month,
payable in arrears.
The number of days referred to in paragraph 5.1 for the collection and clearance
of remittances is hereby amended to read three (3) Business days.
The renewal date specified in the first sentence of Paragraph 9.1 is hereby
amended to read, January 31, 2000.
The foregoing amendment shall be effective as of October 1, 1997. In all other
respects the terms and conditions of the aforesaid agreement, as the same may
have heretofore been amended shall remain unchanged.
ROSENTHAL & ROSENTHAL, INC.
By: /s/ Sheldon Kaye
------------------------
Sheldon Kaye
Vice President
THE FOREGOING IS ACKNOWLEDGED
& AGREED TO:
MEDICAL STERILIZATION, INC.
By: /s/ D. Michael Deignan
------------------------
D. Michael Deignan
President and CEO
<PAGE>
Exhibit (10)(10)
August 15, 1997
MEDICAL STERILIZATION INC.,
225 Underhill Blvd.
Syosset NY 11791
Re: Financing Agreement
Dated: October 17, 1994
It is mutually agreed that the above mentioned agreement between us shall be
amended as hereinafter provided:
The rate of advance specified in Paragraph 2.1 is hereby amended to read, eighty
five percent (85%).
The foregoing amendment shall be effective as of August 15, 1997. In all other
respects the terms and conditions of the aforesaid agreement, as the same may
have heretofore been amended shall remain unchanged.
ROSENTHAL & ROSENTHAL, INC.
By: /s/ Sheldon Kaye
------------------------
Sheldon Kaye
Vice President
THE FOREGOING IS ACKNOWLEDGED
& AGREED TO:
MEDICAL STERILIZATION, INC.
By: /s/ D. Michael Deignan
------------------------
D. Michael Deignan
President and CEO
Exhibit (10)(18)
JOINT MARKETING AGREEMENT
AGREEMENT dated as of April 9, 1997 by and between E-BEAM Services, Inc.,
a New Jersey corporation ("EBS"), having its offices at 146 DuPont Street,
Plainview, New York 11803, and Medical Sterilization Inc., a New York
corporation ("MSI"), having its offices at 225 Underhill Boulevard, Syosset, New
York 11791.
WITNESSETH
WHEREAS, MSI is engaged in the business of conducting contract electron
beam processing ("Contract Processing"), utilizing a 4.5 MeV accelerator
("Accelerator") for such purposes;
WHEREAS, MSI and Shamrock Technologies, Inc., a New York corporation
("Shamrock") are parties to a Toll Processing Agreement (the "TPA") and an
agreement for the sale of the Accelerator to Shamrock (the "Sale Agreement").
WHEREAS, MSI desires to arrange for the orderly transition to EBS of MSI's
Contract Processing services for all of its Contract Processing customers except
Shamrock (the "CP Customers"), as listed on Schedule A attached hereto, upon
expiration of the TPA, and EBS desires to assist MSI in such transition and to
provide Contract Processing services for the CP Customers from and after
expiration of the TPA; and
WHEREAS, MSI and EBS desire to institute certain procedures in order to
facilitate the orderly transfer of the CP Customers to EBS;
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and for good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, EBS and MSI hereby agree as follows:
<PAGE>
1. Responsibilities of MSI Prior to the Transfer of CP Customers to EBS.
MSI shall continue its current Contract Processing activities and
responsibilities toward CP Customers, including, but not limited to, operations,
quality control and maintenance in a manner consistent with its past practices,
at its sole cost and expense and for its own account, for the period (the
"Transition Period") commencing upon the execution of this Agreement (the
"Closing Date") and terminating, in the case of each CP Customer, upon the
successful transfer of such CP Customer to EBS (the "Transfer Date"). On the
Closing Date MSI shall provide EBS with a list of all CP Customers, attached as
Schedule A hereto, setting forth the name, address, contact persons, product
description, historical volumes and pricing on a monthly basis during the 39
months ended March 31, 1997 for each CP Customer, and a list of the names,
addresses and contact persons of all CP Customer prospects, attached as Schedule
B hereto. From time to time during the Transition Period as reasonably requested
by EBS, MSI shall also: (i) make available to EBS the services of Mike Fogarty
and Diana Motorella and such other MSI personnel as MSI and EBS shall agree upon
for purposes of familiarizing EBS with MSI's marketing, sales and account
management procedures for current and prospective CP Customers; (ii) introduce
EBS sales representatives to CP Customers; (iii) provide information on CP
Customers' companies, products, sales histories and key employees to EBS; and
(iv) provide EBS with copies of dose maps and processing procedures, including
detailed explanations of such maps and procedures. During the Transition Period
MSI shall also (a) provide EBS' representatives with suitable office facilities
and telephone (with voicemail) reasonably satisfactory to them at the MSI
facility in Syosset, New York (the "Syosset Facility"); (b) assist EBS in
setting up a site on the World Wide Web and an electronic mail address for EBS;
(c) provide EBS with ready access to Device Master
-2-
<PAGE>
Records and processing agreements; (d) jointly develop with EBS forward plans
for effective transfer of its Contract Processing operations to EBS; and (e)
take all other actions necessary to provide an effective transition of CP
Customers to EBS.
2. Responsibilities of EBS During the Transition Period. During the
Transition Period EBS shall be responsible for marketing, sales and account
management for current and prospective CP Customers.
3. Commissions Payable to MSI. (a) EBS shall pay to MSI commissions (the
"Commissions") equal to the lesser of (i) $350,000 or (ii) (except as otherwise
provided in subparagraphs (b) and (c) below) 15% of EBS's revenues from routine
Contract Processing for transferred CP Customers on EBS's 4.5 MeV accelerator
(the "Processing Revenues") during the period from the Transfer Date to December
31, 2000 (the "Payment Period"). The Commissions shall be paid as follows: (i)
upon the execution of this Agreement, EBS shall make an advance payment to MSI
of $150,000 (the "Advance Payment"); (ii) the first $300,000 in Commissions
shall be paid 50% to MSI and 50% to EBS (to cover the Advance Payment); and
(iii) the remaining $50,000 of Commissions shall be paid to MSI. All Commissions
payable to MSI will be paid ten (10) business days after the end of the calendar
month in which EBS invoices a CP Customer for Contract Processing services
performed for it by EBS.
(b) Notwithstanding anything contained in subparagraph 3(a) above,
no Commission shall be earned by MSI or paid by EBS during the Payment Period in
respect of Processing Revenues received by EBS during the Payment Period from
any CP Customer from which EBS received Processing Revenues in 1996 in an amount
greater than the Processing Revenues received in 1996 by MSI from such CP
Customer for the Contract Processing of the
-3-
<PAGE>
same group of customer products. If however, MSI's Processing Revenues in 1996
from such CP Customer for such products were between 51% and 90% of the total
Processing Revenues received in 1996 by both MSI and EBS from such CP Customer
for such products, then EBS shall pay MSI a Commission in respect of Processing
Revenues during the Payment Period from such CP Customer at the rate of 50% of
the Commission otherwise payable and if MSI's Processing Revenues in 1996 from
such CP Customer for such products were more than 90% of the total Processing
Revenues received in 1996 by both MSI and EBS from such CP Customer for such
products, then EBS shall pay MSI a Commission in respect of Processing Revenues
during the Payment Period from such CP Customer at the full rate.
(c) Notwithstanding the provisions of subparagraphs 3(a) and (b)
above, Commissions shall be payable at the rate of 7 1/2% of MSI's Processing
Revenues during the Payment Period from Rieke Corporation and at the rate of 10%
of MSI's Processing Revenues during the Payment Period from Vivus Corporation.
4. Fees Payable to EBS. During the period commencing upon the Closing Date
and terminating upon the expiration of the TPA, MSI shall pay to EBS a fee of
10% of MSI's revenues from Contract Processing services in excess of $50,000 per
calendar month or pro rata for a period of less than a calendar month (excluding
any Contract Processing revenues invoiced by MSI to Shamrock), payable ten (10)
business days after the end of the calendar month in which MSI invoices such
Contract Processing services.
5. Toll Processing Agreement. (a) MSI shall net extend the TPA beyond its
expiration date. For the purposes of this Agreement, the expiration date of the
TPA will be either (i) September 30, 1997, (ii) October 31, 1997, (iii) November
30, 1997 or (iv) December 31,
-4-
<PAGE>
1997, such date to be chosen by Shamrock by giving ninety (90) days prior
written notice thereof to MSI. Upon receipt of any such notice from Shamrock,
MSI shall immediately notify EBS of Shamrock's choice of expiration date and
finish EBS with a copy of such notice. MSI shall enter into no agreements, reach
no understandings and make no commitments of any kind, direct or indirect, for
electron beam processing beyond the expiration date of the TPA to any individual
or entity (a "Person") without the prior written consent of EBS.
(b) MSI hereby agrees to provide EBS up to 24 beam hours per month
of electron beam processing time for non-PTFE processing while the TPA is still
in effect; provided, however, that for the three-month period prior to the
expiration of the TPA, MSI agrees to provide EBS up to 48 beam hours per month
of electron beam processing time for non-PTFE processing and during such period
EBS agrees to buy a minimum of 24 such beam hours. The price to EBS shall be
$450 per beam hour used.
6. Transition Processing Phase. (a) Commencing on the day following the
expiration of the TPA and ending on the last day of the third calendar month
thereafter (the "Transition Processing Phase"), MSI shall use beam time at its
Syosset Facility exclusively for Contract Processing for CP Customers awaiting
transition to EBS or for Contract Processing of EBS's own customers, at EBS's
sole discretion. EBS shall bill and collect the actual revenues from all such
customers, and EBS will pay MSI on the tenth business day of each month an
amount equal to the product of $450 times the number of beam hours used during
the prior month for Contract Processing by such customers. MSI will be paid by
EBS for such Contract Processing services, regardless of whether or not EBS has
actually collected such revenues from customers. The Transition Processing Phase
may be extended by up to four additional months, month-by-month,
-5-
<PAGE>
on thirty (30) days prior written notice from EBS to MSI, provided that the
Transition Processing Phase will not extend beyond April 30, 1998 (the "Final
Transfer Date"). During each of the first two months of the Transition
Processing Phase, MSI shall make available to EBS up to 400 beam hours per month
and EBS shall be required to buy a minimum of 250 beam hours per month, during
the third month (and any additional months) of the Transition Processing Phase,
MSI shall make available to EBS 200 beam hours per month and EBS shall be
required to buy a minimum of 100 beam hours per month. EBS will use its best
efforts to provide MSI with forecasts and advance notification of its
anticipated usage in order to assist MSI in planning personnel scheduling.
(b) Simultaneously herewith, MSI will enter into the confidentiality
agreement attached hereto as Schedule C with regard to all Contract Processing
performed at the Syosset Facility for or at the request of EBS or any CP
Customer.
(c) The parties acknowledge that the Transition Processing Phase may
be limited in 1998 by Nassau County air emissions permit considerations. MSI
shall use its best efforts to overcome, or minimize any such limitations to the
extent economically reasonable, and EBS will pay 50% of the reasonable
out-of-pocket expenses incurred by MSI and approved before their expenditure by
EBS, to overcome or minimize such limitations.
7. Payment for Unused Beam Time. If EBS does not buy the
minimum beam hours specified in paragraphs 5 and 6 above, EBS shall pay MSI $250
for each such unused beam hour.
8. Services Included with Beam Time. MSI shall supply
EBS with all services customarily supplied with the purchase of beam hours
including but not limited to operations, manpower and supervision, quality
control and quality assurance services, product handling and
-6-
<PAGE>
logistics including unloading, receiving, warehousing, handling, preparation for
shipment and loading onto trucks for shipment.
9. Sale of Accelerator. MSI shall not consummate the sale of the
Accelerator to Shamrock or any other Person before the completion of the
Transition Processing Phase. In the event that Shamrock does not consummate the
purchase of the Accelerator on or before the Final Transfer Date, or if, on or
before the Final Transfer Date, Shamrock advises MSI that it is unwilling or
unable to consummate the purchase of the Accelerator, or if Shamrock and MSI
agree to terminate the Sale Agreement, then MSI shall give EBS prompt notice
thereof and an irrevocable option for thirty (30) days from the date of receipt
by EBS of such notice to enter into a binding agreement to buy the Accelerator
in accordance with the terms contained in the Letter of Intent between MSI and
EBS dated January 20, 1997, a copy of which is attached hereto as Schedule D.
10. Services of Mike Fogarty. MSI shall cause and allow Mike Fogarty to
commit up to 40% of his normal working hours to EBS during the three (3) months
following the Closing Date (including making at least three (3) day-long trips
per month at EBS's discretion), primarily for purposes of meeting CP Customers.
MSI shall also cause and allow Mike Fogarty to commit up to 30% of his normal
working hours to EBS during the remaining term of the TPA and during the
Transition Processing Phase. In addition, EBS shall have the option to utilizing
up to 40% of Mike Fogarty's normal working hours following the Final Transfer
Date for a $600 per-diem reimbursement which EBS shall pay to MSI. MSI shall
cooperate with EBS' reasonable requests in determining the allocation of Mike
Fogarty's time to satisfy the provisions of this paragraph 10.
-7-
<PAGE>
11. Software. MSI shall provide its contract processing operations
software (the "Software") to EBS without charge on an exclusive basis. In the
event that EBS determines to utilize any or all of the Software for its ongoing
operations, it shall notify MSI thereof no later than November 30, 1997,
whereupon MSI shall as promptly as practicable thereafter facilitate the
installation of the Software at the EBS facility in Cranbury, New Jersey and
shall provide without charge to EBS such training and documentation as EBS may
request in order to enable EBS to effectively utilize the Software. At the
request from time to time of EBS, MSI shall promptly maintain the Software after
its installation and/or customize the Software. MSI shall provide such
maintenance or customization through Steve Nyman or such other qualified person
as may be acceptable to EBS, and EBS shall pay $90 per hour for such services.
Such services will be provided at, or by telephone from, the Syosset Facility
unless other arrangements are necessary or mutually agreed upon.
12. Non-Competition. For a period of five (5) years following the first
day of the Transition Processing Phase, MSI will not offer Contract Processing
services nor allow any Person to utilize the Accelerator while it is situated at
the Syosset Facility, except as otherwise provided in paragraph 6.
13. Joint Press Release. MSI and EBS shall issue a joint press release
within fourteen (14) days after the execution of this Agreement. The contents of
the press release shall be mutually agreed upon by MSI and EBS.
14. Representation and Warranties of MSI. MSI represents and warrants to
EBS as follows:
-8-
<PAGE>
(a) Organization. MSI is a corporation duly organized, validly
existing and in good standing under the laws of New York. MSI has all requisite
corporate power and authority to conduct its Contract Processing operations as
they are now being conducted.
(b) Authorization; Validity of Agreement. MSI has the requisite
corporate power and authority to execute, deliver and perform this Agreement and
to consummate the transactions contemplated hereby. The execution, delivery and
performance by MSI of this Agreement and its consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of MSI, and no other corporate proceedings on the part of MSI are
necessary to authorize the execution, delivery and performance of this Agreement
by MSI and its consummation of the transactions contemplated hereby. This
Agreement has been duly executed, authorized and delivered by MSI and, assuming
due authorization, execution and delivery of this Agreement by EBS, is a valid
and binding obligation of MSI, enforceable against MSI in accordance with its
terms, except as such enforceability may be subject to or limited by applicable
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally.
(c) No Violations; Consents and Approvals.
(i) The execution, delivery and performance of this Agreement
by MSI does not, and the consummation by MSI of the transactions contemplated
hereby will not, (x) violate any provision of the certificate of incorporation
or By-laws of MSI, (y) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
guarantee, other evidence of
-9-
<PAGE>
indebtedness, license, lease, option, contract, undertaking, understanding,
covenant, agreement, including but not limited to the TPA and the Sale
Agreement, or other instrument or document (collectively, a "Contract") to which
MSI is a party or by which any of its properties or assets may be bound or
otherwise subject or (z) violate any order, writ, judgment, injunction, decree,
law, statute, rule or regulation applicable to MSI or any of its properties or
assets.
(ii) No filing or registration with, notification to, or
authorization, consent or approval of, any foreign, provincial, United States
federal, state, county, municipal or other local jurisdiction, political entity,
body, organization, subdivision or branch, legislative or executive agency or
department or other regulatory service, authority or agency (a "Governmental
Entity") or any other Person is required in connection with the execution,
delivery and performance of this Agreement by MSI or the consummation by MSI of
the transactions contemplated hereby.
(d) Litigation; Compliance with Law; Licenses and Permits.
(i) There is no action, suit or proceeding pending or, to the
best knowledge of MSI, any investigation pending or any action, suit or
proceeding threatened, which in any way involves or affects the ability of MSI
to consummate the transactions contemplated by this Agreement.
(ii) Except as otherwise indicated in subparagraph 6(c) above,
MSI has every license, permit, certification, qualification or franchise issued
by any Governmental Entity (each, a "License") and every approval,
authorization, waiver, variance, exemption, consent or ratification by or on
behalf of any Person that is not a party to this Agreement (each, a "Permit")
required for it to conduct its Contract Processing business as presently
conducted. All such
-10-
<PAGE>
Licenses and Permits are in full force and effect and MSI has not received
notice of any pending cancellation or suspension of any thereof nor, to the best
knowledge of MSI, is any cancellation or suspension thereof threatened. The
applicability and validity of each such License or Permit will not be adversely
affected by the consummation of the transactions contemplated by this Agreement.
(e) Material Contracts.
(i) Schedule E attached hereto sets forth a true, complete and
correct list of every Contract to which MSI and a CP Customer are parties or
which affect any CP Customer or the ability of MSI to perform any of its
obligations hereunder (collectively, the "Material Contracts"). MSI has
heretofore provided true, complete and correct copies of all Material Contracts
to EBS.
(ii) Except as set forth in Schedule E, (i) there is not, and
to the best knowledge of MSI there has not been, claimed or alleged by any
Person with respect to any Material Contract, any existing default, or event
that with notice or lapse of time or both would constitute a default or event of
default, on the part of MSI or, to the best knowledge of MSI, on the part of any
other party thereto and (ii) no consent, approval, authorization or waiver from,
or notice to, any Governmental Entity or other Person is required in order to
maintain in full force and effect any of the Material Contracts, other than such
consents, approvals, authorizations and waivers that have been obtained and are
unconditional and in full force and effect and such notices that have been duly
given. Copies of all such consents, approvals, authorizations, waivers and
notices have been delivered to EBS.
-11-
<PAGE>
(f) No Brokers. MSI has not employed any broker or finder or
incurred any liability for any brokerage or investment banking fees,
commissions, finders' fees or other similar fees in connection with the
transactions contemplated by this Agreement.
(g) CP Customers. There has not been any adverse change in the
business relationship of MSI with any CP Customer, and MSI is not aware of any
threatened loss of business from any CP Customer, except for payment disputes
from time to time, including recently, with Hermitage Hospital Supply, Inc.
(h) No Misstatements or Omissions. No representation or warranty by
MSI contained in this Agreement and no statement contained in any certificate,
list, Schedule or other instrument specified or referred to in this Agreement,
whether heretofore furnished to EBS or hereafter furnished to EBS pursuant to
this Agreement, contains or will contain any untrue statement of a material fact
or omits or will omit any material fact necessary to make the statements
contained therein, in light of the circumstances under which it was made, not
misleading.
15. Representations and Warranties of EBS. EBS represents and warrants to
MSI as follows:
(a) Organization. EBS is a corporation duly organized, validly
existing and in good standing under the laws of New Jersey. EBS is duly
qualified to do business as a foreign corporation in New York.
(b) Authorization Validity of Agreement. EBS has the requisite
corporate power and authority to execute, deliver and perform this Agreement and
to consummate the transactions contemplated hereby. The execution, delivery and
performance by EBS of this Agreement and its
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<PAGE>
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of EBS, and no other corporate proceedings
on the part of EBS are necessary to authorize the execution, delivery and
performance of this Agreement by EBS and its consummation of the transactions
contemplated hereby. This Agreement has been duly executed, authorized and
delivered by EBS and, assuming due authorization, execution and delivery of this
Agreement by MSI, is a valid and binding obligation of EBS, enforceable against
EBS in accordance with its terms, except as such enforceability may be subject
to or limited by applicable bankruptcy, insolvency, reorganization, or other
similar laws affecting the enforcement of creditors' rights generally.
(c) No Violations; Consents and Approvals.
(i) The execution, delivery and performance of this Agreement
by EBS does not, and the consummation by EBS of the transactions contemplated
hereby will not, (x) violate any provision of the certificate of incorporation
or By-laws of EBS, (y) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
guarantee, other evidence of indebtedness, license, lease, option, contract,
undertaking, understanding, covenant, agreement or other instrument or document
to which EBS is a party or by which any of its properties or assets may be bound
or otherwise subject or (z) violate any order, writ, judgment, injunction,
decree, law, statute, rule or regulation applicable to EBS or any of its
properties or assets.
-13-
<PAGE>
(ii) No filing or registration with, notification to, or
authorization, consent or approval of, any Governmental Entity or any other
Person is required in connection with the execution, delivery and performance of
this Agreement by EBS or the consummation by EBS of the transactions
contemplated hereby.
(d) Litigation. There is no action, suit or proceeding pending or,
to the best knowledge of EBS, any investigation pending or any action, suit or
proceeding threatened, which in any way involves or affects the ability of EBS
to consummate the transactions contemplated by this Agreement.
(e) No Brokers. EBS has not employed any broker or finder or
incurred any liability for any brokerage or investment banking fees,
commissions, finders' fees or other similar fees in connection with the
transactions contemplated by this Agreement.
16. Covenants.
(a) Conduct of the Business by MSI. During the period from the
Closing Date to the Final Transfer Date, unless EBS shall otherwise agree in
writing, MSI shall conduct its Contract Processing business in the ordinary
course, consistent with past practice, and in such a manner that would not
result in a breach of this Agreement or any of its representations or covenants
contained herein.
(b) Access to Information. Between the Closing Date and the Final
Transfer Date, MSI shall (x) provide to EBS and its representatives access to
all offices and other facilities of MSI, and to all books and records of MSI,
(y) permit EBS and its representatives to make such inspections and to make
copies of such books and records as it may reasonably require and (z) cause its
officers to furnish EBS with such financial and operating data and other
information as
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<PAGE>
EBS may from time to time reasonably request; provided, however, that such
access shall be limited to the Contract Processing operations and the CP
Customers.
(c) Consents. MSI shall use its best efforts, in as timely a manner
as is reasonably practicable, to make all filings with, and to obtain all
Licenses and Permits from, all Governmental Entities and other Persons necessary
or required to be obtained in order to consummate the transactions contemplated
by this Agreement (collectively, the "Consents"). MSI shall provide EBS with
copies of (i) all filings made with any Governmental Entity or other Person and
any other information supplied to any of them in connection with this Agreement
and the transactions contemplated hereby and (ii) all Consents.
(d) Best Efforts. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
17. Termination. Notwithstanding anything herein to the contrary, this
Agreement may be terminated at any time prior to the Final Transfer Date by
mutual written consent of EBS and MSI.
18. Miscellaneous.
(a) Fees and Expenses. Except as otherwise contemplated by, or
expressly provided for in, this Agreement, all costs and expenses incurred in
connection with this Agreement and the consummation of the transactions
contemplated hereby shall be paid by the party incurring such expenses.
-15-
<PAGE>
(b) Amendments. This Agreement can be amended, supplemented or
modified and any provision hereof may be waived, only by a written instrument
making specific reference to this Agreement signed by the party against whom the
same is sought to be enforced.
(c) Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given upon (a) transmitter's confirmation of a
receipt of a facsimile transmission, (b) confirmed delivery by a standard
overnight carrier or when delivered by hand or (c) the expiration of five (5)
business days after the day when mailed in the United States by certified or
registered mail, postage prepaid, addressed at the following addresses (or at
such other address for a party as shall be specified by like notice):
if to MSI, to: 225 Underhill Boulevard
Syosset, New York 11791
Telephone: 516-496-8822
Facsimile: 516-496-8328
Attention: D. Michael Deignan
with a copy to: Harvey Cohen, Esq.
Murtagh, Cohen & Byrne
1100 Franklin Avenue
Garden City, New York 11530
Telephone: 516-747-1000
Facsimile: 516-747-1355
if to EBS, to: 146 DuPont Street
Plainview, New York 11803
Telephone: 516-349-1940
Facsimile: 516-349-1945
Attention: Paul R. Minbiole
with a copy to: Michael J. Shef, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Telephone: 212-704-6140
Facsimile: 212-704-6288
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<PAGE>
19. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
be considered one and the same agreement.
21. Entire Agreement. This Agreement (together with the Schedules hereto)
and the agreements and documents delivered pursuant to this Agreement,
constitute the entire agreement of the parties with respect to the subject
matter hereof, and collectively supercede all other prior or contemporaneous
negotiations, commitments, agreements and understandings (whether written or
oral), between the parties with respect to the subject matter hereof.
22. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
23. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by either of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
party.
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<PAGE>
24. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the state of New York applicable to agreements made
and to be performed entirely in that state.
E-BEAM SERVICES, INC.
By: /s/ Paul R. Minbiole
----------------------------
Name: Paul R. Minbiole
Title: President
MEDICAL STERILIZATION, INC.
By: /s/ D. Michael Deignan
----------------------------
Name: D. Michael Deignan
Title: President
-18-
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<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000723592
<NAME> Medical Sterilization, Inc.
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 32,446
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<CHANGES> 0
<NET-INCOME> 503,822
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.09
</TABLE>
