As filed with the Securities and Exchange Commission on May 11, 1998
Registration No. 33-96330
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
To
FORM SB2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MEDICAL STERILIZATION, INC.
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(Name of small business issuer as specified in its charter)
New York 8091 11-2621408
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(State or other jurisdiction of Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number Identification No.)
225 Underhill Boulevard, Syosset, New York 11791 (516) 496-8822
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(Address and telephone number of principal executive offices)
225 Underhill Boulevard, Syosset, New York 11791
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(Address of principal place of business)
D. MICHAEL DEIGNAN
President and Chief Executive Officer
Medical Sterilization, Inc.
225 Underhill Boulevard, Syosset, New York 11791 (516) 496-8822
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(Name, address and telephone number of agent for service)
Copy to:
Harvey Cohen, Esq.
Murtagh, Cohen & Byrne, 1100 Franklin Avenue, Garden City, New York 11530
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of the Post-Effective
Amendment to the Registration Statement and from time to time thereafter, when,
as and if the shareholders determine to sell their stock, the option holders and
warrant holders determine to exercise their options or warrants and sell the
stock purchased thereby and the Preferred shareholder determines to convert the
Preferred Stock and sell the stock acquired thereby.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1932, check the following box. [x]
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MEDICAL STERILIZATION, INC.
Cross Reference Sheet
Furnished Pursuant to Rule 404(c)
Form SB2 Item Number and Caption Caption in Prospectus
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1. Front of the Registration Statement and
Outside Front Cover Page of Prospectus............ Outside Front Cover Page
of Prospectus.
2. Inside Front and Outside Back Cover Page
of Prospectus..................................... Inside Front Cover Page
of Prospectus.
3. Summary Information & Risk Factors ............... Prospectus Summary; Risk
Factors.
4. Use of Proceeds................................... Use Of Proceeds.
5. Determination of Offering Price................... Not Applicable.
6. Dilution.......................................... Dilution.
7. Selling Security Holders.......................... Selling Shareholders
8. Plan of Distribution.............................. Plan of Distribution.
9. Legal Proceedings................................. Legal Proceedings.
10. Directors and Executive Officers................. Directors and Executive
Officers.
11. Security Ownership of Certain Beneficial
Owners and Management............................ Security Ownership of
Certain Beneficial Owners
and Management.
12. Description of Securities........................ Description of Securities
13. Interest of Named Experts and Counsel............ Experts.
14. Disclosure of Commission Position on Indem-
nification for Securities Act Liabilities........ Indemnification.
15. Organization within Last Five Years.............. Not Applicable.
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16. Description of Business.......................... Business.
17. Management's Discussion and Analysis of Plan
of Operation .................................... Management's Discussion
and Analysis of Financial
Conditions and Results of
Operation.
18. Description or Property.......................... Property.
19. Certain Relationships and Related Transactions... Certain Relationships and
Related Transactions.
20. Market for Common Equity and Related Stock-
holder Matters.................................. Market for Registrant's
Common Equity and Rela-
ted Shareholder Matters.
21. Executive Compensation.......................... Executive Compensation.
22. Financial Statements............................ Financial Statements.
23. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.......... Changes In and Disagree-
ments With Accountants
on Accounting and Finan-
cial Disclosure.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
4,349,792 Shares of Common Stock
of
MEDICAL STERILIZATION, INC.
On February 14, 1996 by Registration Statement on Form SB2 effective that
date, Medical Sterilization, Inc. (the "Company") registered 4,470,971 shares of
Common Stock, par value $.01 per share (the "Shares") reserved for issuance upon
exercise of options granted or to be granted and outstanding warrants;
conversion of outstanding shares of Preferred Stock and resale of Shares held by
certain shareholders.
A Registration Statement on Form S-8 was filed on July 22, 1996 relating
to the 1996 Stock Option Plan and 500,000 shares registered thereunder.
This Prospectus is applicable to the possible sale of shares of Common
Stock, par value $.01 per share of the Company (the "Shares") by the Selling
Shareholders, see "Selling Shareholders", Page 48. The Shares may be received by
the Selling Shareholders, (a) upon the exercise of up to 805,000 Shares
presently reserved for exercise of outstanding options at prices ranging from
$.74 to $9.00 per share under the 1994 Stock Option Plan, See "The 1994 and 1996
Stock Option Plans", Page 37; (b) upon the exercise of outstanding warrants to
purchase 355,000 Shares at a price of $2.00 per share, See "Warrants", Page 44;
and (c) upon the conversion at $2.00 per share of 687,500 shares of Series B
Convertible Preferred Stock (the "Series B Stock") and upon the conversion at
$1.00 per share of 1,945,625 shares of Series C Convertible Preferred Stock (the
"Series C Stock"), See "Preferred Stock", Page 45; This Prospectus is also
applicable to the following Shares: 15,000 Shares heretofore purchased by John
R. Hoover, upon exercise of options, 300,000 Shares purchased by Dr. William C.
Cartinhour, Jr. (now held by the William C. Cartinhour, Jr., Trust), 25,000
Shares purchased by Shamrock Technologies, Inc. ("Shamrock") and 150,000 shares
purchased by TFX Equities Incorporated on private placements, 16,667 Shares
issued to Dr. Kennard H. Morganstern and 16,667 shares issued to Harvey Cohen
upon conversion of 33,334 Shares of Series A Convertible Preferred Stock (the
"Series A Stock"), and 33,333 Shares purchased by Dr. Kennard H. Morganstern
upon exercise of a warrant.
THESE SECURITIES INVOLVE A HIGH DECREE OF RISK. SEE "RISK FACTORS", PAGE 10.
THESE SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE
THEIR ENTIRE INVESTMENT. ANY PURCHASE OF STOCK ON EXERCISE OF A WARRANT OR
OPTION WILL RESULT IN AN IMMEDIATE AND TOTAL DILUTION OF THE ENTIRE PURCHASE
PRICE TO A NEGATIVE VALUE.
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The Selling Shareholders have advised the Company that they have no
present intention of selling their Shares but that their Shares may be sold from
time to time in the over-the-counter market at prices prevailing at the time of
sale, or in private transactions at negotiated prices, and any commissions paid
or discounts given will be those customary in the type of transaction involved
and will be paid by the Selling Shareholder. The Company will not receive any
proceeds from the sale of such Shares.
Any brokers and dealers through whom sales of the Shares are made may be
deemed "underwriters" within the meaning of the Securities Act of 1933 with
respect to the Shares, and any profits realized or commissions received may be
deemed underwriting compensation.
Expenses of this offering (other than brokerage commissions) are payable
by the Company and estimated not to exceed approximately $10,000.
The average of the bid and asked prices for the Company's Common Stock as
reported on the NASDAQ Bulletin Board on April 15, 1998 was $1.13.
The Company is obligated to amend the Registration Statement and this
Prospectus in the event of fundamental changes in the affairs of the Company
since the date hereof. No person has been authorized to give any information or
to make any representations, other than as contained herein, in connection with
the offer contained in this Prospectus, and if given or made, such information
or representations must not be relied upon. This Prospectus does not constitute
an offer or solicitation in any jurisdiction in which such offer or solicitation
is unlawful.
The date of this Prospectus is May 11, 1998.
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TABLE OF CONTENTS
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Page
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Available Information 8
Prospectus Summary 8
Risk Factors 11
Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
Use Of Proceeds 26
Business 26
Legal Proceedings 33
Market for Registrant's Common Equity and Related Shareholder's Matters 33
Directors and Executive Officers 34
Executive Compensation 36
Security Ownership of Certain Beneficial Owners and Management 40
Certain Relationships and Related Transactions 42
Plan of Distributions 43
Description of Securities 43
Selling Shareholders 49
Indemnification 52
Changes In and Disagreements With Accountants on Accounting and Financial 52
Disclosure
Legal Opinions 52
Additional Information 53
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TABLE OF CONTENTS
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Page
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Index to Financial Statements F-1
Financial Statements F-2 - F-19
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act or 1934, as amended, (the "Exchange Act"), and the Company files
reports and other information with the Securities and Exchange Commission (the
"Commission") as required under Section 15(d) or the Exchange Act. Reports and
other information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at (1) Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C.; (2) 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and (3) 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can be obtained from the Public Reference
Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The Company has furnished and intends to continue to furnish to
shareholders, after the close of each fiscal year, an annual report relating to
the operations of the Company, containing financial statements audited and
reported upon by independent certified public accountants. In addition, the
Company may furnish to shareholders such other reports as may be authorized,
from time to time, by the Board of Directors.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements and related notes set forth
elsewhere in this Prospectus. Each prospective purchaser of shares offered
hereby is urged to read this Prospectus in its entirety.
General Development of Business
Medical Sterilization, Inc. ("MSI" or the "Company") established its
sterilization facilities to provide offsite processing and sterilization
services for health care providers such as (a) hospitals; and (b) manufacturers
of disposable medical devices in the Northeast corridor consisting of New York,
New Jersey, Pennsylvania and the New England states. It also processed
industrial products and polytetrafluoroethylene ("PTFE"). As of May 16, 1997 the
Company entered into a joint venture agreement with TFX Equities Incorporated
("TFX"), a wholly owned subsidiary of Teleflex Incorporated ("Teleflex") to form
SSI Surgical Services, Inc. ("SSI") which would provide offsite and onsite
processing and sterilization services for health care providers in all of North
America except the Northeast corridor. MSI has a 37.5% interest in SSI and TFX
has a 62.5% interest in SSI. Furthermore, TFX acquired 100 shares of Preferred
Stock for the sum of $5,000,000.
In furtherance of its decision to focus on its Instrument Set
sterilization processing business, on March 17, 1997, MSI agreed to sell its
electron beam radiation accelerator (the "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
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processing customers, on April 9, 1997, MSI entered into a Joint Marketing
Agreement with E-BEAM Services, Inc. ("E-BEAM").
On January 8, 1997, TFX acquired all of the Company's outstanding Series B
Convertible Preferred Stock ("Series B Stock") and Series C Convertible
Preferred Stock ("Series C Stock") from the prior owners and on January 30, 1997
TFX acquired an additional 150,000 shares of Common Stock from the Company
giving it approximately 48% of the Company's outstanding voting securities.
Sterilization Services to Health Care Providers:
As of April 1, 1998, the Company had entered into 71 contracts with
revenues from these contracts of approximately $20,227,000 through 2003 with
hospitals in its area to sterilize their surgical instruments, utensils and
other items requiring sterilization ("Sterilizable Items") and to provide the
hospitals with MSI's standard containerized reprocessable instrument sets (the
"Instrument Sets"). The Company is also negotiating contracts or purchase
orders, with additional hospitals although there is no assurance that these
contracts will be executed.
Sterilization of Disposable Medical Products and Processing of
Industrial Products Including PTFE
During 1997 MSI provided contract sterilization of disposable medical
products for approximately 39 manufacturers located within an approximately 300
mile radius of the Company's facility in Syosset.
In addition, during 1997 the Company also performed radiation processing
for 15 manufacturers of plastic products and irradiated PTFE, also known by the
term "Teflon", a registered trademark of E. I. Dupont de Nemours & Co., for
Precision Micron Powders, Inc. ("Precision") and for Shamrock pursuant to a Toll
Processing Agreement, which was extended to December 31, 1997. Revenues from
such processing services were approximately $3,040,000 in 1997.
Because of the closing of its sale of the accelerator, scheduled for April
30, 1998 and its agreement with E-BEAM, it has not provided such sterilization
services in 1998. Furthermore, pursuant to the Toll Processing Agreement, the
Company is not permitted to process PTFE for any other party after December 31,
1997.
Risk Factors
The purchase of the securities involves a high degree of risk. Risk
factors to be considered include the Company's history of losses since
inception; the Company's lack of working capital; the competition which could
affect growth; the Company's dependence on key personnel; the Company's
dependence in 1998 and in the future on revenues from sterilization services of
Sterilizable Items; the termination of its processing of medical disposables,
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industrial products and PTFE (in 1997 such processing accounted for
approximately 41.2% of the Company's revenues); the effect of government
regulations; the fact that dividends are not likely; the control by insiders and
the provisions for indemnification of Directors; and the fact that all the
Company's principal shareholders are registering all shares owned by such
persons for resale.
Use of Proceeds
The Selling Shareholders and any warrant holders or option holders who
receive Common Stock on the exercise of options or warrants and the holders of
Series B and C Stock who receive shares of stock on conversion of Preferred
Stock will receive all of the proceeds of the sale of shares of Common Stock in
this offering. and the Company will receive no part thereof. As previously set
forth, this registration statement relates only to the sale of shares held or
acquired by the Selling Shareholders. The holders of the Preferred Stock may
convert the Preferred Stock into Common Stock, and the Company will not receive
any funds on such conversion.
Market for Registrant's Common Equity
The Company's Common Stock is sold in the over-the-counter market and is
quoted on the NASDAQ Bulletin Board. The average of the bid and asked prices on
April 15, 1998 was $1.13.
MSI was incorporated on May 27, 1982. The Company's executive offices are
located at 225 Underhill Boulevard, Syosset, New York 11791 and its telephone
number is (516) 496-8822.
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RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
THE COMPANY HAS INCURRED SUBSTANTIAL LOSSES SINCE ITS
FORMATION. ACCORDINGLY, THE SHARES SHOULD NOT BE PURCHASED BY ANYONE
WHO CANNOT AFFORD THE LOSS OF HIS OR HER ENTIRE INVESTMENT.
1. History of Losses, Adverse Operating History. The Company has operated
at a loss or very small profit for each year. In 1996, the net loss was
approximately $995,000 and after deduction of undeclared dividends on preferred
stock was approximately $1,119,000. For the year ended December 31, 1997, the
Company's net income was approximately $613,000, and the net income after
deducting the undeclared dividends on preferred stock was approximately
$504,000. From inception through December 31, 1997 the Company had an
accumulated deficit of approximately $7,961,000. During this period the Company
financed its operations through receipts from operations. the sale of stock and
borrowing money from individuals, corporations and lending institutions.
2. Lack of Working Capital; Need for Additional Financing. Since the date
of incorporation, May 27, 1982, the Company was engaged in raising capital,
leasing and equipping a sterilization facility and establishing a market
program. It reported as a development stage enterprise through December 31,
1984. Subsequent thereto it has engaged in service to hospitals, contract
radiation service and the processing of PTFE. As previously stated, the contract
radiation service and processing of PTFE terminated at the end of 1997.
As of December 31, 1997, the Company had working capital of approximately
$1,530,000 as compared to working capital of approximately $292,000 as of
December 31, 1996. The increase in working capital was primarily the result of
the classification of $1,250,000 as current assets held for sale in connection
with the sale of the accelerator.
The principal of its loan with its former principal bank is $451,836 as of
December 31, 1997 with the principal being amortized on a monthly basis at the
rate of $12,500 per month with a balloon payment due May, 1998. The principal of
the loan is to be paid out of the proceeds from the sale of the Accelerator to
Shamrock scheduled for April 30, 1998.
The Company's line of credit arrangement with Rosenthal & Rosenthal, Inc.
("Rosenthal") calls for a revolving collateralized line of credit of up to
$2,000,000 with an expiration date of January 31, 2000. The line of credit is
collateralized by basically all of the assets of the Company. The Company can
borrow up to 85% of its eligible accounts receivable. The interest rate on the
facility is prime plus 2%.
In January, 1997, the Company entered into a loan agreement with TFX. The
principal amount of the loan is now $250,000 and bears interest at the rate of
prime plus 1%. The note is due and payable on May 8, 1998.
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On April 21, 1997, the Company entered into an operating lease agreement
with North Fork Bank in the amount of $1,500,000, pursuant to which the Bank
will purchase the Company's instrument needs and lease them to the Company. The
agreement has an interest rate of prime plus 1/2%. The lease agreement is
guaranteed by Teleflex. Furthermore, on April 9, 1997, the Company received
$150,000 from E-BEAM on execution of the Joint Marketing Agreement and no later
than April 30, 1998, the Company will receive approximately $1,250,000 from the
sale of the accelerator to Shamrock.
As of May 16, 1997, the Company entered into a joint venture agreement
with TFX to incorporate SSI which would provide offsite and on-site processing
and sterilization services for health care providers in all of North America
except the Northeast corridor. In this joint venture MSI has 37.5% of the Common
Stock of SSI and TFX has 62.5% of such Common Stock. In addition, TFX acquired
100 shares of Preferred Stock for the sum of $5,000,000.
Management believes that with the extension of the Rosenthal agreement,
the operating lease agreement with North Fork Bank, the loan from TFX, the
moneys received from E-BEAM and to be received from Shamrock, and the SSI joint
venture the Company will have adequate working capital for the foreseeable
future. However, the Company may require additional working capital in the
future and there can be no assurance that such additional working capital will
be on acceptable terms, if at all.
3. 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 an 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 offsite contractor.
Furthermore, some hospitals have union agreements that preclude or mitigate a
hospital's ability to outsource.
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, 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.
The number of hospitals the Company has been servicing has not changed
significantly in 1995 and 1996, averaging about 27 hospitals, but as of March
20, 1998, the number of hospitals under contract was 43. The aggregate annual
revenue from the hospital contracts has increased from approximately $4,726,000
in 1996 to approximately $5,819,000 in 1997. Prior to 1997, the Company's
revenues from its hospital sterilization services were at a
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volume below that which yielded a profit to the Company. In 1997 there was a
profit of approximately $305,000 from its hospital sterilization services.
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 offsite instrument processing and
sterilization services. A wholly owned subsidiary of Teleflex, Endoscopy
Specialists, Incorporated ("ESI"), specializes in on-site instrument processing.
However, as previously stated MSI and TFX jointly formed SSI to provide
instrument processing 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..
4. Dependence on Key Personnel. Dr. Kennard H. Morganstern, the founder
and Chairman of the Board of the Company, has entered into a transition
agreement with the Company, providing that for a period of three years
commencing September 8, 1996 Dr. Morganstern will serve as Chairman of the Board
of the Company and make available at least 50% of his time for consulting
purposes at an annual salary of $75,000. D. Michael Deignan was elected
President on September 8, 1995 and became Chief Executive Officer on January 3,
1996.
5. Dependence on Relatively Few Customers. As previously stated, the
Company has contracted to sell its accelerator to Shamrock no later than April
30, 1998. The contract to irradiate PTFE terminated on December 31, 1997. In
addition, the Company has entered into a Joint Marketing Agreement with E-BEAM
which provides for the Company to transfer its customer lists to E-BEAM.
Accordingly, the processing of PTFE and medical disposables and products has
terminated.
In its sterilization services for health care providers, the Company has
71 contracts with 43 hospitals and is not dependent on a relatively few
customers.
6. Government Regulations. The Company has complied with the requirements
of and obtained a license from the New York State Department of Labor, Division
of Safety and Health Radiological Health Unit for its electron beam radiation
sterilization and processing facility. This license is in force.
The Company also 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
unless extended.
The Company is also registered with the Department of Health and Human
Services, Public Health Service of the Food and Drug Administration ("FDA"), and
conforms to the FDA compliance program with regard to the industrial
sterilization or medical devices. The Company complies with the FDA compliance
program, even though for these purposes, a hospital (the Company, by extension)
is not subject to the FDA regulations.
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The Company also complies with the regulations of the New York State
Department of Health, acting through the Nassau County Department of Health,
with regard to the disposition of effluents. The Company complies with
regulations of the New York State Department of Environmental Conservation
concerning the handling and disposal of regulated medical waste.
Finally, the Company also complies with the requirements of the
Occupational Safety and Health Administration ("OSHA").
7. Dividends Not Likely. For the foreseeable future it is anticipated that
any earnings which may be generated from operations of the Company will be used
to finance the growth of the Company and that cash dividends will not be paid to
shareholders. In addition, the terms of certain of the Company's loan
agreements, the Financing Agreement with Rosenthal & Rosenthal, Inc. and the
Series B and C Stock prohibit the payment of dividends on Common Stock.
8. Dilution and Market Price. As of April 15, 1998, the Company had
3,170,496 Shares outstanding. The tangible book value (deficit) of the shares as
of said date is ($.06). 805,000 Shares to be received by the Selling
Shareholders upon the exercise of options granted under the Company's 1994 Stock
Option Plan, 355,000 Shares to be received by the Selling Shareholders upon the
exercise of warrants, 2,633,125 Shares issuable to the Selling Shareholders upon
conversion of Series B and C Stock, and 556,667 Shares presently held by Selling
Shareholders and acquired either by purchase in private placements, exercise of
options and warrants or conversion of Preferred Stock are registered hereunder
for the future sale of said shares by the Selling Shareholders and are the
subject of this prospectus. Although the Company cannot predict that any warrant
holder or option holder will exercise their warrants or options, the issuance of
such Shares upon exercise of the warrants, options and the conversion of the
Preferred Stock will constitute an immediate substantial dilution in earnings
per share but an increase in book value per share to existing shareholders. The
Selling Shareholders may realize a dilution of their investment because the
exercise price of their options or warrants may be higher than the book value
per share of the Common Stock after the exercise. Furthermore, any sales of
substantial amounts of the Company's stock in the open market by the Selling
Shareholders could have a significantly adverse effect on the market price of
such stock. The Company will not receive the proceeds of sales of stock by the
Selling Shareholders.
9. Control by Insiders. As of April 15, 1998, all officers and directors
including designees of TFX as a group held approximately 66% of the Company's
outstanding stock. Dr. Cartinhour bought 300,000 shares of the Company's Common
Stock in a private placement on September 3, 1987. Dr. Cartinhour is not deemed
to be an insider.
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On January 8, 1997, approximately 45% of the voting shares of the
Company's stock was acquired by TFX. TFX purchased the Series B Stock and Series
C 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. In January,
1997, the Company issued 150,000 shares of its common stock to TFX to pay
$300,000 of accounts payable due to Pilling Weck, a subsidiary of Teleflex. This
increased TFX's interest in the outstanding voting securities to approximately
48%.
For the purposes of the foregoing calculations of percentage ownership of
stock, the securities which are not outstanding but could be outstanding on the
exercise of stock options and warrants or conversion of the Preferred Stock have
been deemed outstanding. It is clear that after the exercise of options and
warrants and conversion of Convertible Preferred Stock, the Company will be
controlled by insiders.
10. Indemnification of Directors. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
Company's ByLaws or New York Law, or otherwise, the registrant has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
11. Preferred Stock. In 1994, the Company restructured the 750,000 shares
of Series A Convertible Preferred Stock into what now amounts to 687,500 shares
of Series B Stock and 1,945,625 shares of Series C Stock. The Series C Stock is
automatically converted into Common Stock on December 30, 2004 and there are no
dividends payable or accrued on such stock. Furthermore, the Series C Stock will
be automatically converted into Common Stock if the market price of the
Company's Common Stock as quoted on NASDAQ, attains and maintains for 90 days a
price of $3.00 per share during the five years ending October 31, 1999. The
Series B Stock will be automatically converted into Common Stock if the market
price of the Company's Common Stock attains and maintains for 90 days a price of
$6.00 per share during the five years ending October 31, 1999. The Series B
Stock matures December 30, 1999 and dividends accrue at the rate of 8% per year.
At that time the Company will have to pay to the Series B Shareholders the sum
of $1,373,000 plus an amount equal to all unpaid accrued dividends unless the
Series B Stock has been automatically converted as set forth above. In the event
the Series B Stock has not been converted prior to December 30, 1999, the
Company will either have to negotiate an extension of time to pay such sum or
obtain
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other financing to pay it. There is no assurance at this time that the Company
will be able to obtain sufficient funds to pay the Series B shareholders or
obtain an extension of time.
12. The Lease. On November 20, 1995, the landlord and the Company entered
into a new lease covering the period from March 1, 1996 to February 28, 2001 at
annual rates of $456,000 for the first three years and $504,000 for the next two
years.
13. Shares Registered by Selling Shareholders. All of the Company's
principal shareholders, as well as its key employees, are registering for resale
all shares received or to be received by such persons on exercise of options,
warrants or preferred stock or on private placements for resale. These persons
are registering 556,667 shares of Common Stock, 2,633,125 shares of Common Stock
on conversion of the Series B and Series C Stock, and options and warrants
exercisable within 60 days to acquire 1,160,000 shares in the aggregate. Sales
of substantial amounts of Common Stock in the open market following this
offering could adversely affect the market price of the Common Stock.
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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, 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
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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.
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
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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.
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
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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.
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.
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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.
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
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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.
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.
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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.
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.
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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 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
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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.
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.
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USE OF PROCEEDS
The Selling Shareholders and any warrant holders or option holders who
receive common stock on the exercise of options or warrants and the holders of
Series B and C Stock who receive shares of stock on conversion of Preferred
Stock will receive all of the proceeds of the sale of shares of Common Stock in
this offering, and the Company will receive no part thereof. As previously set
forth, this registration statement relates only to the sale of shares held or
acquired by the Selling Shareholders. The holders of the Preferred Stock may
convert the Preferred Stock into Common Stock and the Company will not receive
any funds on such conversion.
BUSINESS
A. General Development of Business
The Company provides off-site reprocessing and sterilization of the
Company's Instrument Sets as well as 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"), 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 Accelerator to process various industrial products and to perform
certain modifications to those products and to process 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 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.
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"). In 1996, the Company made a significant
investment in a national marketing of its services. However, on May 16, 1997,
the Company entered into a Joint Venture Agreement with TFX, a wholly owned
subsidiary of Teleflex setting the terms on which the parties would participate
in the organization, capitalization and operation of a corporation to be known
as 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 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
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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 steri-track system for tracking
instruments in hospitals. In September, 1997, SSI entered into a multi-year
contract to provide total management of a Hospital's sterile processing
functions.
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".
B. Narrative Description of Business
The Company presently provides offsite processing and sterilization
services to healthcare providers. As previously stated, through December
31,1997, it also provided processing and sterilization services to manufacturers
of medical disposable products and processed various types of plastic products
through the use of its Accelerator to achieve certain modifications of such
products. The following chart shows the approximate amount and percentage of
total revenues and the net income (loss) for each of the classes of services for
the last two fiscal years:
Amount and Percentage of Total
Revenues and Net Income (Loss) Year Ended
for each Class of Service December 31
- ------------------------- -----------
1997 1996
------------------------
Sterilization Services to
Health Care Providers
Amount of Revenues $ 5,819,000 $ 4,752,000
Percent of Total 58.8 55.1
Income (Loss)* 305,000 (338,000)
Sterilization of Disposable
Medical Products and
Processing of Plastic
Products
Amount of Revenues $ 1,031,000 $ 948,000
Percent of Total 10.4 11.0
Income (Loss)* (77,000) (610,000)
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Processing of PTFE**
Amount of Revenues $ 3,040,000 $ 2,925,000
Percent of Total 30.8 33.9
Income (Loss)* 395,000 (50,000)
* Certain operating expenses as well as certain selling, general and
administration expenses are not expenses attributable to any class of
services but have been apportioned among the classes of services. Because
the sterilization services to health care providers have been growing more
rapidly than the other services, a greater amount of expenses were
allocated to the hospital services in 1997. The Company allocated expenses
to the various categories of service by a variety of methods for example:
Expenses such as plant rentals and realty taxes are allocated based upon
square footage used by each service. Utility expenses are allocated by the
power demands of each service's equipment for which detailed records are
kept. Product liability insurance is allocated based upon levels of sales
of each service. Factory maintenance overhead expenses are allocated based
upon detailed time records kept by the Company. General overhead expenses
are allocated to each service based upon the relative sales volume of each
service.
** The Company has agreed that it will not process PTFE for any other entity
during and after the termination of its agreement with Shamrock and in
view of its sale of its Accelerator to be completed April 30, 1998, it
will no longer sterilize disposable products or process plastic products.
(1) Sterilization Services to 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 April 15, 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. Future revenues from these contracts as of April 15, 1998 is
approximately $20,227,000. 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,
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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, 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 reprocesses Instrument Sets and
Sterilizable Items for numerous customers and 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 Ethylene Oxide ("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."
29
<PAGE>
(2) 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 Busse Hospital Disposables, Elkay Products,
Inc. and Hermitage Hospital Supply Corp. 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, 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."
(3) Processing of Plastic 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
30
<PAGE>
services through December 31, 1997. The income from such services was
$3,040,310 in 1997.
(4) 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 an
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, 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.
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
31
<PAGE>
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 MSI's 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.
(5) Employees
As of April 15, 1998, the Company had 86 full-time and 27 part-time
employees. Management believes its relations with its employees are good. None
of its employees are covered by any collective bargaining agreement.
(6) Government Regulations
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 the FDA's program
32
<PAGE>
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 OSHA. 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.
(7) Insurance
The Company carries a general liability policy of $1,000,000 with
additional coverage of $6,000,000. To date, there have been no liability claims
resulting from the use of the Company's services.
(8) 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 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.
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.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' 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 interdealer
prices, without retail markup, markdown, 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 is 278. No dividends have been paid
on Common Shares. The terms of
33
<PAGE>
certain of the Company's loan agreements, the Financing Agreement with Rosenthal
& Rosenthal, Inc., and the Series B and C Stock prohibit the payment of
dividends on Common Stock.
1998 High Bid Low Bid
- ---- -------- -------
First Quarter $1.313 $0.875
Second Quarter(through April 15, 1998) 1.500 1.063
1997
- ----
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
- ----
Fourth Quarter 2.625 1.000
Third Quarter 1.375 1.375
Second Quarter 3.000 0.938
First Quarter 1.563 0.938
DIRECTORS AND EXECUTIVE OFFICERS
(a) Identification of Directors
Set forth below is a list of the Company's Directors, their ages, their
term as a Director, their present principal occupation and business
associations, the period during which such positions have been held, and, if
less than five years, a brief account of their previous positions. This
information is as of April 15, 1998 and is based on data furnished by the
Directors. All Directors are elected for a term of one year. No arrangements,
understandings or family relationships exist among or with any of the Directors,
except that the Amendment to the Certificate of Incorporation filed November 28,
1994 gives the holders of the outstanding shares of Series B and Series C Stock
the power to elect three directors. Pursuant to this authorization, TFX, which
on January 8, 1997, acquired all the outstanding Preferred Stock from the prior
holders, nominated Larry C. Buckelew, John J. Sickler and Harold L. Zuber, Jr.
to serve as directors. They were elected at the January 8, 1997 meeting of the
Board of Directors.
Larry C. Buckelew, age 44, has been a Director since January 8, 1997. He
is and has been since December, 1996 President of TFX Surgical Group, a division
of Teleflex, engaged in the manufacture and distribution of medical instruments
and services. Prior thereto he was President of LCB Consultants, a consulting
firm from February, 1996, Sunrise Medical Inc., a manufacturer of medical
devices from June, 1993, and President of Bio Clinic Corp. (Sunrise Division), a
manufacturer of medical devices from November, 1986. He is a nominee of TFX,
which as the holder of 100% of the outstanding Preferred Stock has the power
pursuant to the Corporation's Certificate of Incorporation to elect three
directors.
34
<PAGE>
D. Michael Deignan, age 54, was elected President, Chief Operating Officer
and Director of the Company on September 8, 1995 and Chief Executive Officer on
December 31, 1995. For approximately two years prior to September, 1995 he was
President and Chief Executive Officer of Tonometrics, Inc., a developer of a
patented regional tissue oxygenation monitoring system. For approximately eight
years prior thereto he held various executive positions with Baxter Healthcare
Inc., a manufacturer and distributor of medical supplies and equipment.
John R. Hoover, age 68, has been a Director since May, 1983. He is retired
but was for more than five years the director of the Medical Products Division
of W. L. Gore & Associates, Inc., a manufacturer of wire and cabling, teflon
products and medical products. He also serves on the Board of Directors of W. L.
Gore & Associates, Inc.
Kennard H. Morganstern, age 73, had been Chairman of the Board, President
and Chief Executive Officer since 1982 except for a period of approximately six
months in 1991 during which another person served as President. On September 8,
1995, he resigned as President and on December 31, 1995, he resigned as Chief
Executive Officer retaining the position of Chairman of the Board. He previously
served as Chairman of the Board and President of Radiation Dynamics, Inc., a
manufacturer of radiation accelerators.
John J. Sickler, age 56, has been a Director since January 8, 1997. He is
and has been since 1990 the President of TFX, a subsidiary of Teleflex engaged
in business development. Teleflex designs, manufacturers and distributes
products and services for the automotive, marine, industrial, medical and
aerospace markets. He is a nominee of TFX, which as the holder of 100% of the
outstanding Preferred Stock has the power pursuant to the Corporation's
Certificate of Incorporation to elect three directors.
Forrest R. Whittaker, age 48, has been a Director since January 17, 1996.
He is and has been since January 1, 1996 the President and Chief Executive
Officer of Paidos Health Management Services, Inc., a company providing health
services. Prior thereto, he was President and Chief Executive Officer of Paidos
Healthcare, Inc. from May, 1993 and prior thereto he was President of V. Mueller
Division of Baxter International, Inc., engaged in the production and
distribution of medical supplies.
Harold L. Zuber, Jr., age 48, has been a Director since January 8, 1997.
He is and has been since 1991 Vice President and Chief Financial Officer of
Teleflex Incorporated. Teleflex designs, manufacturers and distributes products
and services for the automotive, marine, industrial, medical and aerospace
markets. He is a nominee of TFX Equities, which as the holder of 100% of the
outstanding Preferred Stock has the power pursuant to the Corporation's
Certificate of Incorporation to elect three Directors.
(b) Identification of Executive Officers
Set forth below is a list of the Company's executive officers, their ages,
their present positions with the Company, the period during which such positions
have been held and, if
35
<PAGE>
less than five (5) years, a brief account of their previous positions. The
information is based on data furnished by the executive officers as of April 15,
1998.
Kennard H. Morganstern, age 73, had been Chairman of the Board, President
and Chief Executive Officer since 1982 except for a period of approximately six
months in l991 during which another person served as President. On September 8,
1995, he resigned as President and on December 31, 1995 he resigned as Chief
Executive Officer retaining the position of Chairman of the Board. He previously
served as Chairman of the Board and President of Radiation Dynamics, Inc., a
manufacturer of radiation accelerators.
D. Michael Deignan, age 54, was elected President and Chief Operating
Officer on September 8, 1995. On December 31, 1995 he became Chief Executive
Officer. For approximately two years prior thereto he was President and Chief
Executive Officer of Tonometrics, Inc., a developer of a patented regional
tissue oxygenation monitoring system. For approximately eight years prior
thereto he held various executive positions with Baxter Healthcare Inc., a
manufacturer and distributor of medical supplies and equipment.
Michael G. Fogarty, age 64, has been Vice President, Quality Assurance and
Regulatory Affairs of the Company since May, 1983. For more than five years
prior thereto he was employed as a microbiologist by Becton, Dickinson and
Company in their Medical Devices Division. He was Division Manager, Bacteriology
and Sterilization, from 1968 to 1980 and was Corporate Manager, Project
Coordination and Liaison, from 1980 to January, 1984.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the
Corporation's Chief Executive Officer and each of the three other most highly
compensated executive officers of the Corporation whose total salary and bonus
for 1997 exceeded $100,000 (collectively, the "Named Executive Officers") for
services rendered in all capacities to the Corporation for each of the fiscal
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long Term
Compensation
------------
Annual Compensation
-------------------
Securities Underlying All Other
Name & Principal Position Year Salary Bonus Options Compensation
- ------------------------- ---- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
D. Michael Deignan(1) 1997 $159,461 0 0 $3,857.00(2)
President and Chief 1996 $152,884 0 47,170 $3,700.04(2)
Executive Officer
Kennard H. Morganstern, 1997 $ 80,703 0 0 325.00(4)
Ph.D.(3) 1996 $131,308 0 0 915.00
Chairman of the Board
of Directors
- -----------------------
</TABLE>
(1) Mr. Deignan became President and Chief Operating Officer on September 15,
1995. He then became Chief Executive Officer on December 31, 1995.
36
<PAGE>
(2) Includes $2,207 contributed in 1997 and $2,250.04 in 1996 by the Corporation
to vested and unvested defined contribution plans for Mr. Deignan's benefit and
$1,650 in 1997 and $1,450 in 1996 of term life insurance premiums paid by the
Corporation for Mr. Deignan's benefit.
(3) Dr. Morganstern served as the Corporation's President and Chief Executive
Officer since 1982. Upon the hiring of Mr. Deignan on September 15, 1995, Dr.
Morganstern resigned as President. Dr. Morganstern then resigned to allow Mr.
Deignan to become Chief Executive Officer on December 31, 1995. Dr. Morganstern
continues to serve the Corporation as Chairman of its Board of Directors.
(4) Includes $325 in 1997 and $915 in 1996 of term life insurance premiums paid
by the Corporation for Dr. Morganstern's benefit.
Option Grants. No stock options or stock appreciation rights were granted
during the fiscal year ended December 31, 1997 under the Corporation's 1996
Stock Pan to the Named Executive officers.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR 1996
---------------------------------
Individual Grants
-----------------
Percent of
Total Options
Granted to
Options Employees Exercise Price Expiration
Name Granted in Year (1) ($/Share)(2) Date
---- ------- ----------- ------------ ----
<S> <C> <C> <C> <C>
D. Michael Deignan .............. 47,170 20.77% $1.06 3/21/06
Kennard H. Morganstern,
Ph.D ......................... 0 0 0 0
- ----------------
</TABLE>
(1) A total of 227,100 options were granted to employees (including the Named
Executive Officers) in fiscal 1996 under the Company's 1994 and 1996 Stock
Plans.
(2) The exercise price was the fair market value of a share of the Company's
Common Stock at the time of grant as determined in accordance with the Company's
1994 and 1996 Stock Plans. The exercise price may be paid in cash or in shares
of the Company's Common Stock valued at fair market value on the exercise date.
Unexercised Option Holdings. The following table sets forth certain
information concerning unexercised stock options held as of December 31, 1997 by
each of the Named Executive Officers (no options were exercised during fiscal
1996 and 1997 by the Named Executive Officers):
37
<PAGE>
Year End Option Values
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at
Options at Year-End Year-End (1)
------------------- ------------
Name Exercisable *Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
D. Michael Deignan 223,585 23,585 $105,085 $ 4,481
Kennard H. Morganstern,
Ph.D 275,000 0 140,250 0
- -------------
(1) Value is based on the difference between the option exercise price and the
fair market value of the Corporation's Common Stock on December 31, 1997,
multiplied by the number of shares underlying the options.
Employment Contracts and Termination of Employment Arrangements
In September, 1994, the Company entered into a transition agreement with
its then President and Chief Executive Officer, Kennard H. Morganstern. Pursuant
to the agreement Dr. Morganstern resigned as President on September 8, 1995 upon
the election of D. Michael Deignan as President. Dr. Morganstern resigned as
Chief Executive Officer on December 31, 1995 at which time Mr. Deignan became
Chief Executive Officer. The agreement provides that for a period of three years
commencing September 8, 1995, Dr. Morganstern will continue to serve as Chairman
of the Board and, at the option of the new President, make available 50% of his
time for consulting purposes. During this period he will receive a base annual
compensation of 50% of his former compensation, or $75,000, together with normal
benefits provided to other officers of the Company.
Mr. Deignan does not have a long-term employment agreement with the
Company. His employment may be terminated by the Company at any time. The
Company's policy is to make a severance payment of nine months' base salary and
benefits to Messrs. Deignan and Fogarty if their employment is terminated by the
Company.
THE 1994 AND 1996 STOCK OPTION PLANS
On September 29, 1994, the Board of Directors approved the Medical
Sterilization, Inc. 1994 Stock Option Plan (the "1994 Plan) and authorized the
issuance or up to 1,000,000 shares upon the exercise of options granted under
the Plan. The 1983 Stock Option Plan, which authorized the issuance of up to
800,000 shares upon the exercise of options, expired by its terms on May 11,
1993. On July 20, 1995, the shareholders approved the 1994 Stock Option Plan. On
March 31, 1996 the Board of Directors approved the 1996 Stock Plan (the "1996
Plan") and the authorization of 500,000 shares to be issued on exercise of
options granted under the 1996 Plan. This Plan succeeded the 1994 Stock Option
Plan which had no shares remaining available for option grants. The 1996 Stock
Option Plan was approved by shareholders on May 30, 1996.
38
<PAGE>
GRANTS UNDER THE PLAN
Incentive Stock Options ("ISO") may be granted by the Compensation
Committee of the Board of Directors to officers and employees of the Company. An
ISO granted under the Plan may be exercisable immediately or in installments
following a period of two years after grant but must expire within ten years
from the date it is granted (five years in the case of such options granted to
holders of more than 10% of the Company's voting stock). Except in certain
circumstances an ISO may only be exercised so long as the employee continues to
be employed by the Company. The exercise price of such option must be at least
equal to the fair market value of the Company's Common Stock on the date such
option was granted (110% in the case of 10% shareholders) and must be paid in
cash or in stock of the Company valued at its then fair market value. An
employee may not receive ISOs to purchase stock having a maximum fair market
value in excess of $100,000 in any calendar year, with certain exceptions. The
options are non-transferable except by will or by the laws of descent and
distribution. The options terminate three months after the optionee's
relationship with the Company is terminated except if termination is by reason
of total disability or death. In the event of disability, under the 1994 Plan an
option must be exercised within one year after disability. Under the 1996 Plan
exercise must be before the earlier of the specified expiration date or 180
days. In the event of death, both Plans require the exercise to be before the
earlier of the expiration date or 180 days after death.
In addition, the Compensation Committee may issue Non-Statutory Stock
Options under the Plan. The exercise price of these stock options is not limited
and may be below fair market value but cannot be less than the minimum legal
consideration required under the law of the State of New York. These options may
be granted to directors, officers, consultants and key employees of the Company.
The exercise of a Non-Statutory Stock Option would result in ordinary
income for the grantee and a deduction for the Company measured by the
difference between the option price and the fair market value of the shares
received at the time of exercise. Income tax withholding would be required.
The exercise of an ISO would not result in income for the grantee if the
grantee (i) does not dispose of the shares within two years after the date of
grant or one year after the transfer of shares upon exercise and (ii) is an
employee of the Company from the date of grant until three months before the
exercise date. If those requirements are met, the basis of the shares upon later
disposition would be the option price. Any gain will be taxed to the employee as
long-term capital gain and the Company would not be entitled to a deduction. The
excess of the market value on the exercise date over the option price is an item
of tax preference, potentially subject to the alternative minimum tax.
If the grantee disposes of the shares prior to the expiration of either of
the holding periods, the grantee would recognize ordinary income and the Company
would be entitled to a deduction equal to the lesser of the fair market value of
the shares on the exercise date minus
39
<PAGE>
the option price or the amount realized on disposition minus the option price.
Any gain in excess of the ordinary income portion would be taxable as longterm
or shortterm capital gain.
As of April 15, 1998, there were Non-Statutory Options to purchase 692,500
shares of stock at prices ranging from $.74 to $9.00 and Incentive Stock Options
to purchase 157,500 shares at $.74 per share, 75,000 shares at $.75 per share,
and 134,670 shares at $1.06 per share and 118,500 shares at $1.28 per share.
Compensation of Directors
On May 22, 1997, the Board of Directors approved the grant of a
Non-Statutory Stock Option to purchase 15,000 shares of common stock of the
Company at the price of $1.50 per share to each of John R. Hoover and Forrest R.
Whittaker, the two outside directors. Each option became exercisable on December
31, 1997. The grant replaces the participation fee of $500.00 per meeting paid
to the directors prior to May 22,1997. All directors are reimbursed for expenses
in connection with attending Board and Committee meetings.
On January 17, 1996, the Company granted Mr. Whittaker a warrant to
purchase 25,000 shares of Common Stock at $2.00 per share, which is now
exercisable in full. Grants of options to Directors are set forth under Option
Grants, supra.
The Company has purchased directors' and officers' liability insurance
from National Union Fire Insurance Corporation of Pittsburgh, PA covering all of
the Company's directors and officers. The aggregate premium for this insurance
policy in 1997 was $26,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth as of April 15, 1998 certain information
regarding the ownership of the Company's voting securities by (i) each person
who, to the knowledge of the Company, beneficially owned more than 5% of the
Company's voting securities outstanding at such date, (ii) each director (or
nominee for director) of the Company, (iii) each Named Executive Officer (as
defined supra under "Executive Compensation") and (iv) all directors (and
nominees for director) and executive officers as a group:
Amount and Nature of Percent of Total
Name and Address (1) Beneficial Ownership (2) Voting Securities (3)
-------------------- ------------------------ ---------------------
John W. Sickler (4) .................... 2,783,125 47.95%
c/o TFX Equities Incorporated
1787 Sentry Parkway West
Building 16, Suite 220
Blue Bell, PA 19422
40
<PAGE>
Kennard H. Morganstern (5)............... 589,400 10.16%
c/o Medical Sterilization, Inc.
225 Underhill Boulevard
Syosset, NY 11791
Dr. William C. Cartinhour, Jr. Trust (6). 364,900 6.29%
c/o Carol Haynes
First Potomac Investment Services
125 Rowell Court
Falls Church, VA 22046
D. Michael Deignan (7) .................. 294,178 5.07%
c/o Medical Sterilization, Inc.
225 Underhill Boulevard
Syosset, NY 11791
Larry C. Buckelew -- --
John R. Hoover (8) ...................... 75,200 1.30%
Forrest R. Whittaker (9) ................ 40,000 0.69%
Harold L. Zuber, Jr ..................... -- --
Michael S. Fogarty (10) ................. 75,000 1.29%
All officers and directors as a
group (8 persons) (11) ................3,850,111 66.34%
- ----------------
1) Pursuant to rules of the Securities and Exchange Commission ("SEC"),
addresses are provided only for 5% beneficial owners.
(2) Except as otherwise noted in the footnotes to this table, each person or
entity named in the table has sole voting and investment power with respect to
all shares shown as owned, based on information provided to the Company by the
persons and entities named in the table.
(3) Total Voting Securities includes 3,170,496 shares of Common Stock, 687,500
shares of Series B Stock and 1,945,625 shares of Series C Stock, outstanding as
of April 15, 1998. As of that date, each outstanding share of Preferred Stock
was convertible into one share of Common Stock. Pursuant to SEC rules, all
outstanding options and warrants which are exercisable within 60 days of April
15, 1998 ("Presently Exercisable Securities") held by the relevant person or
entity are included as outstanding Total Voting Securities for purposes of
determining that person's or entity's Percent of Total Voting Securities, but
are not included for purposes of determining any other person's or entity's
Percent of Total Voting Securities.
(4) Consists of (i) 687,500 shares of Series B Stock and 1,945,625 shares of
Series C Stock and 150,000 shares of Common Stock held by TFX. Mr. Sickler is
President of TFX and has
41
<PAGE>
voting and investment power over the shares held by TFX. Mr. Sickler disclaims
beneficial ownership of the shares held by TFX, except to the extent of his
pecuniary interests therein.
(5) Consists of 17,000 shares of Common stock jointly held with Mrs. Rosalie M.
Morganstern over which Dr. Morganstern has shared voting and investment power,
297,400 shares of Common Stock owned by Dr. Morganstern and 275,000 Presently
Exercisable Securities.
(6) Consists of 364,900 shares of Common Stock held by the Dr. William C.
Cartinhour, Jr. Trust (the "Trust") of which Dr. Cartinhour is the beneficiary
and Ms. Marie C. Woods is the sole trustee. Ms. Woods disclaims beneficial
ownership of all shares held by the Trust.
(7) Consists of 58,800 shares of Common Stock owned and 235,378 Presently
Exercisable Securities.
(8) Consists of 20,000 shares owned by Mr. Hoover 200 shares of Common Stock
owned by Mrs. Beverly Hoover, as to which Mr. Hoover disclaims beneficial
ownership, and 55,000 Presently Exercisable Securities.
(9) Consists of 40,000 Presently Exercisable Securities.
(10) Consists of 75,000 Presently Exercisable Securities.
(11) Consists of 543,400 shares of Common Stock, 687,500 shares of Series B
Stock, 1,945,625 shares of Series C Stock and 680,378 presently Exercisable
Securities. See notes 4, 5, 7, 8, 9 and 10.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Cohen, the Secretary of the Company and a Director in 1996, is a
partner of Murtagh, Cohen & Byrne, which provided legal services to the Company
in part of 1996 and in 1997. In the 1997 fiscal year, the fees were
approximately $79,000. In 1996, when a new law firm was retained by the Company,
the fees paid to Murtagh, Cohen & Byrne were $20,500.
In 1996 the Company made a payment of $33,622 and in 1997 paid $66,638 on
a note held by Dr. Morganstern. The note bears interest at the rate of 1% per
annum over the prime rate. Dr. Morganstern is Chairman of the Company's Board of
Directors. In addition, in 1997 the Corporation made a payment of the balance of
$33,334 due on a $50,000 note held by Harvey Cohen.
On January 8, 1997, TFX acquired 687,500 shares of Series B Stock and
1,945,625 shares of Series C Stock from several of the Oxford Funds and from the
Dr. William Cartinhour, Jr. Trust. After the closing of this transaction,
Kenneth W. Rind, William R. Lonergan and Harvey Cohen resigned as Directors and
Messrs. John J. Sickler, Larry C.
42
<PAGE>
Buckelew and Harold L. Zuber, Jr. were elected as Directors. All three of the
new Directors are officers of Teleflex or affiliated companies.
Prior to this transaction the Company was indebted in the sum of $517,961
to Pilling Weck, part of TFX Surgical Group, a company with which it had a Joint
Marketing Agreement. Mr. Buckelew is President of TFX Surgical Group. On January
30, 1997, $300,000 of the debt was converted into 150,000 shares of the
Company's Common Stock at $2.00 per share which were issued to TFX. After such
conversion, TFX held 2,783,125 shares of voting stock, or 47.95% of the
outstanding voting stock. Mr. Sickler is President of TFX.
In January, 1997, the Company entered into a loan agreement with TFX. The
principal amount of the loan was $500,000, bears interest at the rate of prime
plus 1% and is due and payable on May 8, 1998. The balance of the loan on April
15, 1998 was $250,000.
As of May 16, 1997 the Company entered into a joint venture agreement with
TFX, a wholly owned subsidiary of Teleflex to form SSI Surgical Services, Inc.
("SSI") which would provide offsite and onsite processing and sterilization
services for health care providers in all of North America except the Northeast
corridor. MSI has a 37.5% interest in SSI and TFX has a 62.5% interest in SSI.
Furthermore, TFX acquired 100 shares of Preferred Stock for the sum of
$5,000,000.
PLAN OF DISTRIBUTION
It is anticipated that the Selling Shareholders will individually offer
the securities presently owned by them in the manner set forth on the cover page
of this Prospectus, from time to time in the over-the-counter market at prices
prevailing at the time of sale, or in private transactions at negotiated prices.
In addition, Shares to be issued on the exercise of warrants or options or the
conversion of the Series B and C Stock may also be offered for resale by the
Selling Shareholders in the same manner. The cost of such sales is to be borne
by the Selling Shareholder. The costs of registering the Shares under the
Securities Act are to be borne by the Company. The Company will not receive any
proceeds from the sale of such Shares.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value of $0.01 per share. As of April 1, 1998 there were 3,170,496 shares
outstanding. Shareholders have no preemptive rights. The outstanding shares of
the Common Stock are and the Shares offered hereby by the Selling Shareholders
will, when issued, be fully paid and nonassessable.
43
<PAGE>
Voting rights, Non-Cumulative Voting
Holders of shares of Common Stock of the Company are entitled to cast one
vote for each share held at all shareholders' meetings for all purposes,
including the election of directors. The Common Stock does not have cumulative
voting rights which means that the holders of more than 50% of the Common Stock
can elect 100% of the directors of the Company if they choose to do so subject
to the rights of the Preferred shareholders, as hereinafter set forth. The
Bylaws of the Company require that only a majority of the issued and outstanding
shares of the Company be represented to constitute a quorum and to transact
business at a shareholders' meeting. The Series B and C Shareholders shall vote
together with the common shareholders with each Preferred Shareholder having the
number of votes per share as shall equal the number of shares of Common Stock
into which the Preferred Stock is then converted. The officers and directors of
the Company and TFX own approximately 66.34% of the outstanding shares of Common
Stock assuming exercise of all options, warrants and conversion of all Preferred
Stock. As a practical matter, such group could be in a position to elect all of
the directors of the Company and control its policies. Furthermore, the Series B
and C Shareholders have the right to elect three directors of the seven
authorized pursuant to the Amended Certificate of Incorporation filed in
November, 1994 and the consent of the prior holders of the Preferred Shares
executed September 8, 1995.
Dividends
The Company has not paid any dividends on the Common Stock and anticipates
that for the foreseeable future any earnings will be retained for use in its
business. Certain of the Company's loan agreements and the terms of the Series B
and C Stock prohibit the payment of dividends on the Common Stock. See also
Paragraph 4D in "PREFERRED STOCK" on page 46 infra regarding dividends on Common
Stock.
Liquidation Rights
In the event of any distribution of capital assets, whether voluntary or
involuntary, after creditors have been paid in full and any distribution to
holders of the Preferred Stock, the common shareholders are entitled to share
equally. Upon liquidation or dissolution, each outstanding share of Common Stock
will be entitled to share equally in the assets of the Company legally available
for distribution to shareholders after the payment of all debts and other
liabilities and the payment of $2.00 per share plus an amount equal to all
Accruing Dividends unpaid to the holders of the Series B Stock and the payment
of $1.00 per share to the holders of the Series C Stock. See Paragraph 3 in
"PREFERRED STOCK" on page 46.
Transfer Agent
The transfer agent for the Common Stock of the Company is American Stock
Transfer & Trust Company, 99 Wall Street, New York, New York 10005. The transfer
agent for the Series B and Series C Stock is Harvey Cohen, Esq., 1100 Franklin
Avenue, Suite 303, Garden City, New York 11530.
44
<PAGE>
WARRANTS
The Company has outstanding warrants to purchase an aggregate of 355,000
shares of Common Stock. The number of shares has, and the exercise prices have,
been adjusted by reason of the anti-dilution provisions of the warrant
agreements and agreement with some of the warrant holders. At this time all
warrants are exercisable at $2.00 per share. The shares of stock being
registered hereunder include the shares underlying the outstanding warrants.
(1) In July, 1990, as consideration for the five year $700,000 term loan
and extension and increase to the revolving line of credit made to the Company,
warrants to purchase an aggregate of 100,000 shares of the Company's Common
Stock at $3.00 per share, exercisable through July 20, 1995, were issued to
Apple Bank for Savings. In September, 1994, the exercise date of the warrants
was extended to July 20, 1998 and the exercise price was reduced to $2.00 per
share.
(2) On September 29, 1994, warrants to purchase 40,000 shares of Common
Stock at $2.00 per share were issued to each of John R. Hoover, a Director, and
Harvey Cohen, then a Director of the Company, in connection with services
rendered in the settlement of the Shamrock judgment.
(3) On November 29, 1994, in connection with an agreement with Rosenthal &
Rosenthal, Inc. ("R&R") calling for a revolving secured line of credit of
$2,000,000, MSI issued warrants to R&R to purchase 50,000 shares of Common Stock
at $2.00 per share.
(4) On November 29, 1994, as part of the settlement of the judgment of
approximately $3,752,000, including interest, held by Shamrock, MSI issued
warrants to Shamrock to purchase 75,000 shares of Common Stock at $2.00 per
share.
(5) On February 8, 1995, MSI issued to William R. Lonergan, a newly
elected director, warrants to purchase 25,000 shares of Common Stock at $2.00
per share.
(6) On January 17, 1996 MSI issued to Forrest R. Whittaker, a newly
elected Director, warrants to purchase 25,000 of Common Stock at $2.00 per
share.
The warrant holders have advised the Company that stock received by them
upon the exercise of their warrants may be sold from time to time in the
over-the-counter market at prices prevailing at the time of sale, or in private
transactions at negotiated prices; that they have not entered into any
arrangements with any underwriters with respect to the sale of any of the
Shares; and that any commissions or discounts given or other expenses of sale
will be those customary in the type of transaction involved and will be paid by
the selling warrant holders. The Company will receive approximately $710,000 if
all the warrants are exercised. Although, in view of the fact that the warrant
prices are in excess of current market prices for the Company's stock, it is
unlikely that any warrants will be exercised unless market prices improve
significantly. The warrant holders and brokers and dealers through whom such
Shares are sold may be deemed "underwriters" within the meaning of the
Securities Act of
45
<PAGE>
1933, as amended, with respect to sales, and any profits realized or commissions
received may be deemed underwriting commissions.
Unless otherwise noted, none of the warrant holders has any relationship
to the Company other than as a holder of its securities.
PREFERRED STOCK
In December, 1989, the Company issued 333,334 shares of Series A Stock in
exchange for a convertible demand note issued in January, 1989. In December,
1989, the Company issued 333,333 shares of Series A Stock for $1,000,000
collected in January, 1990. In December, 1989, debt aggregating $500,000 was
converted into 166,667 shares of Series A Stock. In November, 1994, the Company
restructured its Series A Stock (as of June 30, 1994 values) which was due to be
redeemed on December 31, 1994. Of the 800,000 shares of existing Series A Stock,
750,000 shares plus accrued dividends of $1,071,094 were exchanged for two new
series of Convertible Preferred Stock. The remaining 200,000 authorized shares
of Series A Stock were cancelled. $1,375,000 of the original principal amount of
$2,400,000 was exchanged for $1,375,000 of Series B Stock, as a result of a
further exchange. This Series B Stock is now convertible at the option of the
holder into 687,500 shares of Common Stock or cash, at $2.00 per share maturing
December 30, 1999. Dividends accrue on this Series B 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, they will be added to the face amount of the Series B
Stock at the price of $2.00 per share at the time of conversion. $1,945,625 of
the Series A Stock and accrued dividends were exchanged for what is now
1,945,625 shares of Series C Stock. The Series C 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
or accrued on the Series C Stock. At December 31, 1994, the balance due on the
50,000 outstanding shares of Series A Stock and accrued dividends aggregating
$225,000 were converted into a one (1) year term loan with monthly principal and
interest payments. The loan bore interest at the rate of prime plus 3 1/2%. The
loan has been paid in full.
The Series B and Series C Stock have the following rights and privileges:
1. Voting.
(A) General. The Series B and Series C Stock shall vote together with all
other classes of stock of the Company on all actions taken by shareholders of
the Company. Each holder of Series B and Series C Stock shall have such number
of votes per share as shall equal the number of shares of Common Stock into
which each share of Series B and Series C Stock is then convertible.
(B) Board Seats. The holders of the Series B and Series C Stock shall be
entitled, voting together as a single series, to elect three directors of the
Company. In the event the Company shall fail to redeem all of the shares of
Series B Stock as required, the holders
46
<PAGE>
of the Series B Stock voting as a separate series shall be entitled to elect a
majority of the directors.
(C) Board Size. The maximum number of directors shall not exceed
seven.
2. Dividends. (i) The holders of the Series B Stock shall be entitled to
receive out of funds legally available therefor, when and if declared by the
Board of Directors, quarterly dividends at the rate per annum of Eight (8%)
percent per share. The dividends may be paid in cash or accrued at the option of
the Company. If not paid in cash, the dividends shall accrue (the "Accruing
Dividend") whether or not earned or declared, and shall be cumulative and shall
be added to the face amount of the Series B Stock at the rate of $2.00 per share
at the time of conversion of the Series B Stock. (ii) There are no dividends
payable or accrued on the Series C Stock.
3. Liquidation. Upon any liquidation, dissolution or winding up of the
Company, the holders of the Series B Stock shall first be entitled to be paid an
amount equal to $2.00 per share plus an amount equal to all Accruing Dividends
unpaid thereon, and the holders of the Series C Stock shall first be entitled to
be paid an amount equal to $1.00 per share.
4. Restrictions. So long as the Series B and Series C Stock is
outstanding, the Company shall not without approval of two-thirds of the
outstanding Series B and Series C Stock
(A) Create or increase the authorized amount of any additional class
of stock unless same ranks junior to the Series B and Series C Stock as to
distribution of assets on liquidation or increase the authorized amount of the
Series B and Series C Stock.
(B) Consent to liquidation, dissolution or winding up of the Company
or consolidate or merge into or with any entity or sell all or substantially all
of its assets.
(C) Amend its Restated Certificate of Incorporation in a manner
adversely affecting holders of the Series B and Series C Stock.
(D) Purchase or pay any dividend or make any distribution on any
shares of stock other than the Series B Stock except dividends in the form of
additional shares of Common Stock.
(E) Redeem or acquire any shares of Series B Stock except as
provided hereinafter or pursuant to a purchase offer made pro rata to all
holders of Series B Stock.
5. Conversions. The holder of the Series B and Series C Stock shall have
the following conversion rights:
(A) Right to Convert Series B Stock. At any time prior to December
30, 1999, at the holder's option into such number of shares of Common Stock as
is obtained by
47
<PAGE>
multiplying the number of shares of Series B Stock by $2.00 and dividing the
result by the conversion price of $2.00 per share as adjusted pursuant to the
anti-dilution provisions.
(B) Right to Convert Series C Stock. At any time prior to December
30, 2004, at the holder's option, into such number of shares of Common Stock as
is obtained by multiplying the number of shares of Series C Stock by $1.00 and
dividing the result by the conversion price of $1.00 per share as adjusted
pursuant to the anti-dilution provisions.
(C) Mandatory Conversions.
(i) In the event that at any time during the period ending
October 31, 1999, the fair market price of the Company's Common Stock as quoted
on NASDAQ, attains a price of Three ($3.00) Dollars per share and maintains such
price for at least ninety (90) days, all outstanding shares of Series C Stock
shall be automatically converted into shares of Common Stock of the Company on
such ninetieth day.
(ii) In the event that at any time during the period ending
October 31, 1999, the fair market price of the Company's Common Stock as quoted
on NASDAQ, attains a price of Six ($6.00) Dollars per share and maintains such
price for at least ninety (90) days, all outstanding shares of Series B Stock
shall be automatically converted into shares of Common Stock of the Company on
such ninetieth day.
(iii) In the event that the holder of any share or shares of
Series C Stock shall not have converted such share or shares prior to December
30, 2004, such share or shares shall be automatically converted into shares of
Common Stock of the Company on December 30, 2004.
6. Adjustment of Conversion Price. The conversion price shall be
adjusted pursuant to usual antidilution provisions. Whenever the Company shall
issue or sell or be deemed to have issued or sold any Common Stock for a
consideration per share less than the conversion price of the Series B and
Series C Stock in effect prior to such issuance or sale, the conversion price
shall be reduced to the price at which the Company issued or sold such stock.
7. Redemption.
(A) Mandatory. On December 30, 1999, the Company shall redeem all
shares of Series B Stock.
(i) Redemption Price. The redemption price shall be $2.00 per
share plus an amount equal to all unpaid Accruing Dividends.
8. Amendments. The terms of the Series B and/or Series C Stock may not be
modified without the votes of two-thirds of the holders of the Series B and/or
Series C Stock.
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<PAGE>
9. Registration Rights. Pursuant to the Registration Rights Agreement, the
Company has agreed to include the Common Stock issuable on conversion of the
Series B and Series C Stock in any registration of its securities.
The holders of Series B and Series C Stock have advised the Company that
stock received by them upon the conversion of the Series B and Series C Stock
may be sold from time to time in the over-the-counter market at prices
prevailing at the time of sale, or in private transactions at negotiated prices,
that they have not entered into any arrangements with any underwriters with
respect to the sale of any of the Shares and that any commissions or discounts
given or other expenses of sale will be those customary in the type of
transaction involved and will be paid by the Selling Shareholders. The Company
will not receive any of the proceeds of sale. The holders and brokers and
dealers through whom such Shares are sold may be deemed "underwriters" within
the meaning of the Securities Act of 1933, as amended, with respect to sales,
and any profits realized or commissions received may be deemed underwriting
commissions.
SELLING SHAREHOLDERS
The Selling Shareholders are shareholders of the Company who have acquired
Shares, which are not registered, either upon the exercise of options and
warrants, conversion of Series A Stock or upon purchase of said Shares on a
private placement by the Company. The Selling Shareholders also include those
persons who may acquire Shares upon the exercise of options or warrants or the
conversion of Series B and C Stock. If the Selling Shareholders sell the Shares
held by them or to be received by them, it will be deemed a secondary offering
by such shareholders.
In connection with the proposed sale by the Selling Shareholders of the
Shares, the Company has agreed to keep the Registration Statement, of which this
Prospectus is a part, effective with respect to such Shares until nine months
after the date of this Prospectus. The Selling Shareholders have advised the
Company that they have no present intention of selling their Shares but that
their Shares may be sold from time to time in the over-the-counter market at
prices prevailing at the time of sale, or in private transactions at negotiated
prices, that they have not entered into any arrangements with any underwriters
with respect to the sale of any of the Shares and that any commissions or
discounts given or other expenses of sale will be those customary in the type of
transaction involved and will be paid by the Selling Shareholders. The Selling
Shareholders and brokers and dealers through whom such Shares are sold may be
deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended, with respect to sales, and any profits realized or commissions received
may be deemed underwriting commissions.
Unless otherwise noted, none of the Selling Shareholders has any
relationship to the Company other than as a holder or its securities.
49
<PAGE>
<TABLE>
<CAPTION>
SELLING SHAREHOLDERS
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP AS OF APRIL 15, 1998 BEFORE THE
OFFERING OF UNREGISTERED SHARES PREVIOUSLY ACQUIRED ON PRIVATE PLACEMENTS OR
SHARES TO BE ACQUIRED BY THE SELLING SHAREHOLDERS AS A RESULT OF THE EXERCISE OF
WARRANTS AND OPTIONS OR CONVERSION OF PREFERRED STOCK
Amount of
Warrants Options SeriesB Series C Beneficial
to to Convertible Convertible Ownership
Purchase Purchase Preferred Preferred before
Shares Shares Shares Stock Stock Offering
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Apple Bank for Savings -- 100,000 -- -- -- 100,000
Cartinhour, William C., Jr. Trust 300,000 -- -- 300,000
Cohen, Harvey 16,667 40,000 -- -- 56,667
Secretary of the Company
Deignan, Michael D 200,000 -- -- 200,000
President of the Company
Fogarty, Michael G -- -- 75,000 -- -- 75,000
Vice President of the Company
Hanrahan, Joseph -- -- 3,000 -- -- 3,000
Healy, Thomas -- -- 2,500 -- -- 2,500
Hoover, John R 15,000 40,000 -- -- -- 55,000
Director of the Company
Iannucci, Alfonso -- -- 25,000 -- -- 25,000
Janes, William -- -- 1,500 -- -- 1,500
<CAPTION>
Percent of Percent of
Common Amount of Stock
Stock Beneficial to be
Owned Amount Ownership Owned
before being after after
Offering* Offered Offering Offering*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Apple Bank for Savings 1.72% 100,000 0 0
Cartinhour, William C., Jr. Trust 5.17% 300,000 0 0
Cohen, Harvey 0.98% 56,667 0 0
Secretary of the Company
Deignan, Michael D 3.45% 200,000 0 0
President of the Company
Fogarty, Michael G 1.29% 75,000 0 0
Vice President of the Company
Hanrahan, Joseph -- 3,000 0 0
Healy, Thomas -- 2,500 0 0
Hoover, John R 0.95% 55,000 0 0
Director of the Company
Iannucci, Alfonso 0.43% 25,000 0 0
James, William -- 1,500 0 0
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Percent of
Amount of Common Amount of
Warrants Options Series B Series C Beneficial Stock Beneficial
to to Convertible Convertible Ownership Owned Amount Ownership
Purchase Purchase Preferred Preferred before before being after
Shares Shares Shares Stock Stock Offering Offering* Offered Offering
------ ------ ------ ----- ----- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lonergan, William R. -- 25,000 -- -- -- 25,000 0.43% 25,000 0
Morganstern, David B. -- -- 20,000 -- -- 20,000 0.34% 20,000 0
Morganstern, Kennard H. 50,000 -- 275,000 -- -- 325,000 5.60% 325,000 0
Chairman of the Board
Nyman, Steven M. -- 60,000 -- -- 60,000 1.03% 60,000 0
Repman, Calvin -- -- 3,000 -- -- 3,000 -- 3,000 0
Rosenthal & Rosenthal, Inc. -- 50,000 -- -- -- 50,000 0.86% 50,000 0
Rossi, Paul V. 100,000 -- -- 100,000 1.72% 100,000 0
Sengstock, Retta -- -- 25,000 -- -- 25,000 0.43% 25,000 0
Shamrock Technologies, Inc. 25,000 75,000 -- -- -- 100,000 1.72% 100,000 0
Sharpe, John M., Jr. -- -- 10,000 -- -- 10,000 0.17% 10,000 0
Simms, Mildred -- -- 5,000 -- -- 5,000 0.09% 5,000 0
TFX Equities Incorporated 150,000 687,500 1,945,625 2,783,125 47.95% 2,783,125 0
Whittaker, Forrest R. 25,000 -- -- 25,000 0.43% 25,000 0
Director of the Company
TOTAL 556,667 355,000 805,000 687,500 1,945,625 4,349,792 -- 4,349,792
</TABLE>
Percent of
Common
Stock
to be
Owned
after
Offering
--------
Lonergan, William R. 0
Morganstern, David B. 0
Morganstern, Kennard H. 0
Chairman of the Board
Nyman, Steven M. 0
Repman, Calvin 0
Rosenthal & Rosenthal, Inc. 0
Rossi, Paul V. 0
Sengstock, Retta 0
Shamrock Technologies, Inc. 0
Sharpe, John M., Jr. 0
Simms, Mildred 0
TFX Equities Incorporated 0
Whittaker, Forrest R. 0
Director of the Company
TOTAL
* Any securities which are not outstanding but could be outstanding on the
exercise of stock options or warrants or conversion of Series B or C Stock
by a person have been deemed outstanding for purposes of computing the
amount of beneficial ownership and the percentage of outstanding
securities owned by such person.
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<PAGE>
INDEMNIFICATION
Section 726 of the Business Corporation Law of the State of New York
grants each corporation organized thereunder, such as the Company, the power to
indemnify its directors and officers against liabilities for certain of their
acts. Article XII of the Company's By-laws provides for indemnification of
officers and directors of the Company to the extent permitted by Section 726 and
establishes certain procedures to comply therewith.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company,
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 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. Reports on Form 8-KSB dated
October 1, 1997 and October 26, 1997 were filed by the Company.
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Messrs. Murtagh, Cohen & Byrne, 1100 Franklin Avenue,
Garden City, New York 11530. Certain of the members of Murtagh, Cohen & Byrne
own beneficially in the aggregate 48,057 shares of Common Stock, 40,000 shares
issuable upon exercise of warrants and 40,000 shares issuable upon exercise of
options.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Washington D.C. office of the Securities
and Exchange Commission a Post Effective Amendment No. 1 to the Registration
Statement on Form SB2 with respect to the securities offered by this Prospectus.
This Prospectus omits certain information contained in the Post Effective
Amendment No. 1, as permitted by the Rules and Regulations of the Securities and
Exchange Commission. For further information, reference is made to the Post
Effective Amendment No. 1, which may be examined without charge at the
Washington, D.C. office of the Commission and copies of all or any part thereof
may be obtained from the Commission's principal facility in Washington, D.C.
upon payment of the Commission's charge for copying. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not complete and where such contract or other document is an exhibit to the
Post Effective Amendment No. 1, each such statement is deemed to be qualified
and amplified in all respects by the provisions of the exhibit.
53
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Section 726 of the Business Corporation Law of the State of New York
grants each corporation organized thereunder, such as the Company, the power to
indemnify its directors and officers against liabilities for certain of their
acts. Article XII of the Company's Bylaws provides for indemnification of
officers and directors of the Company, to the extent permitted by Section 726
and establishes certain procedures to comply therewith.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the registrant's bylaws or the law of the State of
New York, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Other Expenses of Insurance and Distribution
The estimated expenses of the registrant in connection with the
registration of the Common Stock registered hereby are as follows:
Legal Fees and Expenses $ 6,000
Accounting Fees and Expenses 1,000
Blue Sky Fees and Expenses 1,000
Cost of Copying 1,000
Miscellaneous 1,000
-------
Total $10,000
Recent Sales of Unregistered Securities
A. Common Stock
(1) On November 29, 1994, as part of a settlement with Shamrock, the
Company issued 25,000 shares of Common Stock to Shamrock.
54
<PAGE>
(2) On July 25, 1996, 2 consultants to the Company exercised options to
purchase 25,000 shares of Common Stock at $.10 per share.
(3) On December 15, 1996, one of the consultants exercised an option to
purchase 15,000 shares of Common Stock at $.10 per share.
(4) On January 30, 1997, the Company issued 150,000 shares of Common Stock
to TFX in satisfaction of a debt of $300,000 owed to Pilling Weck.
B. Options
On September 29, 1994, the Board of Directors approved the 1994 Stock
Option Plan authorizing the issuance of up to 1,000,000 shares upon the exercise
of options granted under the Plan. The shareholders approved the 1994 Stock
Option Plan on July 20, 1995. On May 20, 1996, the shareholders approved the
1996 Stock Option Plan authorizing the issuance of an additional 500,000 shares
upon the exercise of options granted under the 1996 Stock Option Plan.
The following options were granted on the dates set forth and are
outstanding:
<TABLE>
<CAPTION>
Date Position at Option
of Grant Name Time of Grant Type # Shares Price Exercisable
- -------- ---- -------------- ---- -------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
9/29/94 Michael G. Fogarty Vice President NSSO 75,000 .74 9/29/94-9/29/04
8/27/86 Thomas Healy Consultant NSSO 2,500 9.00 5/24/88-5/24/98
9/29/94 Kennard H. Morganstern President ISO 75,000 .74 9/29/94-9/29/04
9/29/94 Kennard H. Morganstern President NSSO 200,000 .74 9/29/94-9/29/04
9/29/94 Calvin Repman Supervisor ISO 3,000 .74 9/29/94-9/29/04
9/29/94 Alfonso Iannucci Manager ISO 25,000 .74 9/29/94-9/29/04
9/29/94 Retta Sengstock Manager ISO 25,000 .74 9/29/94-9/29/04
9/29/94 Mildred Simms Supervisor ISO 5,000 .74 9/29/94-9/29/04
9/29/94 David B. Morganstern Manager ISO 20,000 .74 9/29/94-9/29/04
9/29/94 Joseph Hanrahan Supervisor ISO 3,000 .74 9/29/94-9/29/04
9/29/94 William Janes Supervisor ISO 1,500 .74 9/29/94-9/29/04
9/29/94 John M. Sharpe, Jr. Consultant NSSO 10,000 .74 9/29/94-9/29/04
9/29/94 Paul V. Rossi Treasurer NSSO 75,000 .74 9/29/94-9/29/04
7/20/95 Steven N. Nyman Vice President NSSO 60,000 .74 7/20/95-7/20/05
9/11/95 D. Michael Deignan President NSSO 75,000 .74 9/11/95-9/11/05
9/11/95 D. Michael Deignan President ISO 75,000 .75 9/11/95-9/11/05
11/15/95 D. Michael Deignan President NSSO 50,000 .74 9/11/95-9/11/05
11/15/95 Paul V. Rossi Treasurer NSSO 25,000 .74 9/11/95-9/11/05
1/17/96 Harvey Cohen Secretary NSSO 40,000 .74 1/17/96-1/17/06
3/21/96 David Morganstern Manager ISO 25,000 1.06 25% after 3/21/96, 25% yearly
thereafter until 3/21/00
3/21/96 Retta Sengstock Manager ISO 25,000 1.06 " "
3/21/96 Alfonso Iannucci Manager ISO 25,000 1.06 " "
3/21/96 D. Michael Deignan President ISO 47,170 1.06 " "
3/21/96 Mildred Simms Supervisor ISO 5,000 1.06 " "
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Date Position at Option
of Grant Name Time of Grant Type # Shares Price Exercisable
- -------- ---- -------------- ---- -------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
3/21/96 Karen Dodge Manager ISO 2,500 1.06 " "
3/21/96 Kathi O'Shaughnessy Manager ISO 2,500 1.06 " "
3/21/96 Calvin Repman Supervisor ISO 2,500 1.06 " "
9/17/96 Steven M. Nyman Senior Vice President NSSO 50,000 1.19 9/17/96-9/17/06
5/22/97 John R. Hoover Director NQ 15,000 1.50 12/31/97 - 5/22/07
5/22/97 Forrest R. Whittaker Director NQ 15,000 1.50 12/31/97 - 5/22/07
11/26/97 Ivan Zubin Chief Accounting ISO 50,000 1.28 12,500 shares on 11/26/98,
Officer 11/26/99, 11/26/00, 11/26/01
until 11/26/07
11/26/97 Kathryn O'Shaughnessy Director of Account ISO 25,000 1.28 10,000 shares on 11/26/97,
Development 7,500 shares on 11/26/98,
7,500 shares on 11/26/99
until 11/26/07
11/26/97 Calvin Repman Director of Operations ISO 25,000 1.28 10,000 shares on 11/26/97,
7,500 shares on 11/26/98,
7,500 shares on 11/26/99
until 11/26/07
11/26/97 Mildred Simms Manager of Instrument ISO 5,000 1.28 11/26/97-11/26/07
Services
11/26/97 William Janes Supervisor ISO 3,500 1.28 11/26/97-11/26/07
11/26/97 Melody Traversi Supervisor ISO 5,000 1.28 11/26/97-11/26/07
11/26/97 Karen O'Grady Account Manager ISO 5,000 1.28 3,500 shares 11/26/97, 1,500
shares 8/5/98 until 11/26/07
</TABLE>
C. Warrants
As part of the restructuring of Preferred Stock in November, 1994,
warrants to purchase 800,000 shares of Common Stock held by the Preferred
Shareholders were cancelled.
The following warrants have been issued:
(1) In July, 1990, as consideration for the five year $700,000 term loan
and extension and increase to the revolving line of credit made to the Company,
warrants to purchase an aggregate of 100,000 shares of the Company's Common
Stock at $3.00 per share, exercisable through July 20, 1995, were issued to
Apple Bank for Savings. In September, 1994, the exercise date of the warrants
was extended to July 20, 1998 and the exercise price was reduced to $2.00 per
share.
(2) On September 29, 1994, warrants to purchase 40,000 shares at $2.00 per
share were issued to each of Harvey Cohen and John R. Hoover, Directors, in
connection with their services during the negotiation of the settlement of the
judgment held by Shamrock. These warrants are exercisable through September 29,
1999.
(3) On November 29, 1994, in connection with an agreement with Rosenthal &
Rosenthal, Inc. ("R&R"') calling for a revolving secured line of credit of
S2,000,000, MSI issued warrants to R&R to purchase 50,000 shares of Common Stock
at $2.00 per share. These warrants are exercisable through December 30, 1999.
56
<PAGE>
(4) On November 29, 1994, as part of the settlement of the judgment of
approximately $3,752,000, including interest, held by Shamrock, MSI issued
warrants to Shamrock to purchase 75,000 shares of Common Stock at $2.00 per
share. These warrants are exercisable through December 30, 1999.
(5) On February 8, 1995, MSI issued to William R. Lonergan, then a newly
elected director, warrants to purchase 25,000 shares of Common Stock at $2.00
per share. These warrants are exercisable through February 8, 2000.
(6) On January 17, 1996, MSI issued to Forrest R. Whittaker, then a newly
elected director, warrants to purchase 25,000 shares of Common Stock at $2.00
per share. These warrants are exercisable through January 17, 2001.
D. Preferred Stock
In November, 1994, the Company restructured its Series A Convertible
Preferred Stock (as of June 30, 1994 values) which was due to be redeemed on
December 31, 1994. Of the 800,000 shares of existing Series A Convertible
Preferred Stock, 750,000 shares, plus accrued dividends of $1,071,094 were
exchanged for two (2) new series of Convertible Preferred Stock. The remaining
200,000 authorized shares of Series A Convertible Preferred Stock were
cancelled. $1,375,000 of the original principal amount of $2,400,000 was
exchanged for $1,375,000 of Series B Convertible Preferred Stock. This Series B
Convertible Preferred Stock is convertible at the option or the holder into
687,500 shares of Common Stock or cash, at $2.00 per share maturing December 30,
1999. Dividends accrue on this 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, they will be added to the face amount of the Series B
Convertible Preferred Stock at the price of $2.00 per share upon conversion.
$1,945,625 of the Series A Convertible Preferred Stock and accrued dividends
were exchanged for 1,945,625 shares of Series C Convertible Preferred Stock. The
Series C Convertible Preferred Stock is automatically convertible at $l.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 or accrued on the
Series C Convertible Preferred Stock. At December 31, 1994, the balance due on
the 50,000 outstanding shares of Series A and accrued dividends aggregating
$225,000 was converted into a one (1) year term loan with monthly principal and
interest payments. The loan has been paid in full.
In November 16, 1994, the following shares of Series B and Series C
Convertible Preferred Stock were issued to named shareholders in exchange for
their Series A Convertible Preferred Stock.
57
<PAGE>
Series A Series B Series C
Convertible Convertible Convertible
Name Preferred Stock Preferred Stock Preferred Stock
---- --------------- --------------- ---------------
Oxford Venture Fund II,
Limited Partnership 333,333 416,666 642,499
Oxford Venture Fund III,
Limited Partnership 266,667 333,334 514,001
Oxford Venture Fund III,
Adjunct 66,657 83,334 128,501
William C. Cartinhour, Jr.
Trust 83,333 104,166 160,624
On December 14, 1995, the Oxford Venture Funds exchanged some of their
Series B Convertible Preferred Stock for shares of Series C Convertible
Preferred Stock as follows:
Series B Convertible Series C Convertible
Name Preferred Stock for Preferred Stock
---- --------------- ---------------
Oxford Venture Fund II,
Limited Partnership 125,000 250,000
Oxford Venture Fund III,
Limited Partnership 100,000 200,000
Oxford Venture Fund III,
Adjunct 25,000 50,000
On January 8,1997, TFX acquired all of the Company's outstanding Preferred
Stock from the Oxford Funds and the William C. Cartinhour, Jr. Trust.
Registration of the transactions set forth above was not required under
the Securities Act of 1933, as amended, by virtue of Section 4(2) of said Act
exempting "transactions by an issuer not involving a public offering". The
recipients of said shares represented that said shares were acquired and would
be held for investment purposes and not with a view to any distribution thereof,
and the certificates for said shares bear an appropriate legend to such effect.
Furthermore, the exchange of Preferred Stock set forth above is exempt
under Section 3(a)(9) of the Securities Act of 1933, as amended.
58
<PAGE>
Exhibits and Financial Statement Schedules
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.
(5) Opinion of Murtagh, Cohen & Byrne
(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.
(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.
59
<PAGE>
(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 - filed as Exhibit (10)(10) to
Annual Report for the year ended December 31, 1997 on Form 10-KSB and
incorporated herein by reference.
(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.
(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.
60
<PAGE>
(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 - filed as Exhibit (10)(18) to Annual Report for the year ended December
31, 1997 on Form 10-KSB and incorporated herein by reference.
(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)(19) to Annual Report for the year ended December
31, 1997 on Form 10-KSB and incorporated herein by reference.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
(b) Financial Statement Schedules: All schedules are omitted because they
are not applicable, not material, or the required information is shown in the
Financial Statements or Notes thereto.
Undertakings
1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a posteffective amendment to this Registration Statement; (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent posteffective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
61
<PAGE>
(b) That, for the purpose of determining any liability under the
Securities Act of 1933 each such posteffective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a posteffective
amendment any of the securities being registered which remain unsold at the
termination of the 1994 Stock Option Plan or at the termination of the offering.
2. The undersigned registrant also undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
(b) In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
62
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this Post-Effective Amendment No. 2 to the
Registration Statement on Form SB2 to be signed on its behalf by the undersigned
on April 20, 1998.
(Registrant) Medical Sterilization, Inc.
- --------------------------------------------------------------------------------
By /s/ D. Michael Deignan
------------------------------------------------------------------------------
D. Michael Deignan, Principal Executive Officer & President
KNOW ALL PERSONS BY THESE PRESENTS, that each such person whose signature
appears below constitutes and appoints, jointly and severally, D. Michael
Deignan and Harvey Cohen his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Registration Statement on Form SB2 (including post-effective amendments), and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to the Registration Statement on Form SB2 was
signed by the following persons in the capacities and the dates stated.
By /s/ Kennard H. Morganstern
------------------------------------------------------------------------------
Kennard H. Morganstern, Chairman of the Board & Director
Date April 20, 1998
--------------
By /s/ D. Michael Deignan
------------------------------------------------------------------------------
D. Michael Deignan, Principal Executive Officer, President and Director
Date April 20, 1998
--------------
By /s/ Ivan M. Zubin
------------------------------------------------------------------------------
Ivan M. Zubin, Principal Accounting Officer
Date April 20, 1998
--------------
By /s/ Larry C. Buckelew
------------------------------------------------------------------------------
Larry C. Buckelew, Director
Date April 20, 1998
--------------
By /s/ John R. Hoover
------------------------------------------------------------------------------
John R. Hoover, Director
Date April 20, 1998
--------------
By /s/ John J. Sickler
------------------------------------------------------------------------------
John J. Sickler, Director
Date April 20, 1998
--------------
By /s/ Forrest R. Whittaker
------------------------------------------------------------------------------
Forrest R. Whittaker , Director
Date April 20, 1998
--------------
By /s/ Harold L. Zuber, Jr.
------------------------------------------------------------------------------
Harold L. Zuber, Jr., Director
Date April 20, 1998
--------------
63
<PAGE>
CONSENT OF COUNSEL
The consent of Messrs. Murtagh, Cohen & Byrne to the use of its name in
the Prospectus included in this Post-Effective Amendment No. 2 to the
Registration Statement on Form SB2 is contained in its opinion filed as Exhibit
5 to this Post-Effective Amendment No. 2 to the Registration Statement on Form
SB2.
64
<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 F-5
and 1996
Statements of Shareholders' Equity for the years ended F-6
December 31, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 F-7
and 1996
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
===========
See notes to financial statements
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 $ 606,277
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
F-12
<PAGE>
except for the 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:
Note payable 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
Note payable 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
Note payable 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 commercial terms. Instrument
purchases from Pilling Weck, including instruments
F-17
<PAGE>
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
[LETTERHEAD OF MURTAGH, COHEN & BYRNE]
April 24, 1998
Medical Sterilization, Inc.
225 Underhill Boulevard
Syosset, New York 11791
Medical Sterilization, Inc.
Post-Effective Amendment No. 2 to Registration Statement on Form SB2
Dear Sirs:
We have acted as counsel for Medical Sterilization, Inc., a New York
corporation (the "Company"), in connection with Post-Effective Amendment No. 2
to the Registration Statement on Form SB2 (the "Registration Statement") of the
following shares of Common Stock, $.01 par value (the "Common Stock"), of the
Company:
(a) 804,000 shares of Common Stock to be issued upon the exercise of
options granted or to be granted under the Company's 1994 Stock Option Plan, as
amended (the "1994 Stock Option Plan") (the "Option Stock");
(b) 355,000 shares of Common Stock to be issued upon the exercise of
warrants heretofore issued (the "Warrant Stock");
(c) 687,500 shares of Common Stock to be issued upon conversion of
687,500 shares of the Series B Convertible Preferred Stock the ("Conversion
Stock"); and
(d) 1,945,625 shares of Common Stock to be issued upon conversion of
1,945,625 shares of Series C Convertible Preferred Stock (the "Conversion
Stock"); and
(e) 556,667 shares of Common Stock held by persons who bought the Stock on
the exercise of options or upon private placements (the "Placement Stock").
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
opinion, including, but not limited to, the following (a) the Restated
Certificate of Incorporation of the Company filed May 24, 1989; (b) the
Certificates of Amendment of the Certificate of Incorporation filed January 4,
1990, November 28, 1994,
<PAGE>
MURTAGH, COHEN & BYRNE
Medical Sterilization, Inc.
April 24, 1998
Page 2
December 14, 1994, June 17, 1996 and January 5, 1997, and Certificate of
Correction of Certificate of Amendment of Certificate of Incorporation filed
January 10, 1997; (c) the Amended and Restated By-laws of the Company; (d) the
1994 and 1996 Option Plans; (e) the form of warrants; (f) the Series B and C
Convertible Preferred Stock; (g) the agreements with Apple Bank; (h) the
agreements with Shamrock Technologies, Inc.; (i) the agreements with Rosenthal &
Rosenthal, Inc.; (j) the leases and amendments thereto with Barlich Realty,
Inc.; and (k) the agreements with TFX Equities Incorporated.
1. The Company has been duly incorporated and is a validly existing
corporation under the laws of the State of New York.
2. The Placement Stock has been duly and validly issued, fully paid and
nonassessable.
3. The Option Stock, the Warrant Stock and the Conversion Stock will be,
when issued, upon exercise of options or warrants or conversion of Series B and
C Convertible Preferred Stock, validly issued, fully paid and nonassessable.
4. The following additional action will have to be taken: Compliance with
applicable State or Foreign Securities or "Blue Sky" Laws.
5. Except as noted above, no authorization, consent or approval of any
governmental authority is necessary for the sale of the Placement Stock, or the
Option Stock, Warrant Stock and Conversion Stock after issuance.
We know that we are referred to in the Prospectus forming a part of the
Registration Statement, and also under "Legal Proceedings". We hereby consent to
the use of our name herein and to the use of this opinion as a party of Exhibit
5 thereto.
Very truly yours,
MURTAGH, COHEN & BYRNE
By: /s/ Harvey Cohen
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this post-effective amendment on
Form S-3 to the registration statement on Form SB-2 (File No. 333-20187) of our
report, which includes an explanatory paragraph regarding the Company's ability
to continue as a going concern, dated March 18, 1998, on our audits of the
financial statements of Univec, Inc. as of December 31, 1997 and for the years
ended December 31, 1997 and 1996. We also consent to the reference to our Firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
Melville, New York
May 8, 1998.
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 2 to the Registration Statement on Form SB-2 of our
report dated March 16, 1998 relating to the financial statements of Medical
Sterilization, Inc. as of and for the year ended December 31, 1997, which
appears in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Philadelphia, PA
May 8, 1998
