UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended SEPTEMBER 30, 1998
--------------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 2-85008-NY
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MEDICAL STERILIZATION, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer specified in its character)
NEW YORK 11-2621408
- ------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 UNDERHILL BOULEVARD, SYOSSET, NEW YORK 11791
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 496-8822
- --------------------------------------------------------------------------------
(Issuer's telephone number)
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Number of shares of Common Stock, $.01 par value, outstanding as of September
30, 1998.
3,170,496 shares
-----------
<PAGE>
Transitional Small Business Disclosure Format (Check One) Yes |_| No |X|
MEDICAL STERILIZATION, INC.
INDEX
Page No.
--------
Part I. Financial Information
Balance Sheet as of September 30, 1998 (unaudited) ..... 3 - 4
Statements of Operations for the nine months
ended September 30, 1998 and September 30, 1997
(unaudited) ............................................ 5
Statements of Operations for the three months
ended September 30, 1998 and September 30, 1997
(unaudited) ............................................ 6
Statements of Cash Flows for the nine months ended
September 30, 1998 and September 30, 1998
(unaudited) ............................................ 7
Notes to Consolidated Financial Statements ............. 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 10 - 13
Part II. Other Information ...................................... 14
Signatures ............................................. 14
2
<PAGE>
MEDICAL STERILIZATION, INC.
Balance Sheet
September 30,1998
(unaudited)
-----------
ASSETS
Current assets
Cash $ 99,964
Accounts receivable, less allowance for
doubtful accounts of $189,339 1,733,600
Inventory 56,959
Prepaid expenses 150,656
----------
Total current assets 2,041,179
----------
Fixed assets, at cost, less accumulated
depreciation and amortization 6,001,280
Other assets 131,146
----------
Total assets $8,173,605
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $1,494,800
Short term note payable 315,000
Current obligation under capital lease 539,831
----------
Total current liabilities 2,349,631
----------
Long-term liabilities
Long-term debt, less current maturities 966,274
Obligation under capital lease 1,739,149
----------
Total liabilities 5,055,054
----------
Commitment and contingencies (Note 4):
Preferred Stock
Convertible redeemable cumulative preferred
stock, par value $.01 per share, Series B
Authorized 1,000,000 shares, issued and
outstanding 687,500 shares 1,859,647
----------
Continued
See notes to financial statements
3
<PAGE>
MEDICAL STERILIZATION, INC.
Balance Sheet
Continued
September 30,1998
(unaudited)
-----------
Shareholders' equity
Convertible Preferred Stock Series C
Authorized 2,000,000 shares, issued
and outstanding 1,945,625 shares 1,945,625
Common stock, par value $.01 per share
Authorized 10,000,000 shares, issued
and outstanding 3,170,496 shares 31,704
Additional paid-in capital 7,650,841
Accumulated deficit (8,369,266)
----------
Shareholders' equity 1,258,904
----------
Total liabilities and shareholders' equity $ 8,173,605
==========
See notes to financial statements
4
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Operations
(Unaudited)
For the nine months
ended September 30,
-------------------
1998 1997
---- ----
Income
Revenue $ 5,794,905 $ 7,248,963
----------- -----------
5,794,905 7,248,963
Costs and Expenses
Operating 3,656,249 4,440,357
Distribution 564,427 392,269
Selling, general and administrative 1,659,781 1,641,351
Interest 322,992 360,809
----------- -----------
6,203,449 6,834,786
----------- -----------
(Loss) income before income taxes (408,544) 414,177
Income taxes 0 0
----------- -----------
Net (loss) income (408,544) 414,177
Preferred stock dividends 82,143 92,664
----------- -----------
Net (loss) income applicable to common
shareholders $ (490,687) $ 321,513
=========== ===========
Earnings per common shares - basic $ (.15) $ .10
=========== ===========
Earnings per common shares - diluted $ (.15) $ .06
=========== ===========
Weighted average common shares 3,170,496 3,153,829
=========== ===========
Weighted dilutive common shares 3,170,496 5,471,286
=========== ===========
See notes to financial statements
5
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Operations
(Unaudited)
For the three months
ended September 30,
-------------------
1998 1997
---- ----
Income
Revenue $ 1,898,553 $ 2,516,069
----------- -----------
1,898,553 2,516,069
Costs and Expenses
Operating 1,152,324 1,534,457
Distribution 197,289 143,789
Selling, general and administrative 640,369 480,158
Interest 87,775 144,202
----------- -----------
2,077,757 2,302,606
----------- -----------
(Loss) income before income taxes (179,204) 213,463
Income taxes 0 0
----------- -----------
Net (loss) income (179,204) 213,463
Preferred stock dividends 27,381 30,888
----------- -----------
Net (loss) income applicable to common
shareholders $ (206,585) $ 182,575
=========== ===========
Earnings per common shares - basic $ (.06) $ .06
=========== ===========
Earnings per common shares - diluted $ (.06) $ .03
=========== ===========
Weighted average common shares 3,170,496 3,170,496
=========== ===========
Weighted dilutive common shares 3,170,496 5,392,968
=========== ===========
See notes to financial statements
6
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (408,544) $ 414,177
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 495,971 544,238
Changes in assets and liabilities:
Decrease in receivables 657,533 28,947
Decrease (increase) in inventory 13,644 (3,503)
(Increase) in prepaid expenses (45,612) (58,946)
Decrease (increase) in other assets 8,550 (45,396)
Increase in deposits payable 0 150,000
Increase (decrease) in accounts payable
and accrued expenses 563,628 (837,805)
----------- -----------
Net cash provided by operating
activities 1,285,170 191,712
----------- -----------
Cash flows from investing activities:
Net capital expenditures (67,916) (1,226,608)
----------- -----------
Net cash (used) in investing activities (67,916) (1,226,608)
----------- -----------
Cash flows from financing activities:
Registration costs 0 (18,000)
Net (repayments) proceeds from revolving
line of credit (483,735) 187,773
Net borrowings (repayments) under
short-term notes payable 265,000 (19,131)
(Repayments) borrowings of long-term debt (851,836) 33,021
Net (repayments) borrowings under
capital lease obligations (79,165) 943,171
----------- -----------
Net cash (used) provided by
financing activities (1,149,736) 1,126,834
----------- -----------
Net increase in cash 67,518 91,938
Cash at beginning of period 32,446 75,703
----------- -----------
Cash at end of period $ 99,964 $ 167,641
=========== ===========
</TABLE>
See notes to financial statements
7
<PAGE>
MEDICAL STERILIZATION, INC.
Notes to Financial Statements
1. Unaudited Statements:
The accompanying unaudited financial statements have been prepared by the
Company in accordance with generally accepted accounting principles,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements have been condensed or omitted pursuant to such
rules and regulations although management believes that the disclosures
are adequate to make the information presented not misleading. In the
opinion of management, the accompanying financial statements contain all
adjustments necessary to present a fair statement of the results for the
interim period presented. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report filed on Form 10-KSB for the year
ended December 31, 1997.
2. 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. 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. All potentially dilutive securities for the nine
months ended September 30, 1998, and the three months ended September 30,
1998, are considered anti-dilutive. Potentially dilutive securities for
the nine months ended September 30, 1997 computation of diluted earnings
per share consist of options for approximately 371,832 shares and Series C
Convertible Preferred Stock for approximately 1,945,625. Potentially
dilutive securities for the three months ended September 30, 1997
computation of diluted earnings per share consist of options for
approximately 276,847 shares and Series C Convertible Preferred Stock for
approximately 1,945,625. Series B Preferred Stock was excluded from
the1997 calculation of diluted earnings per share since the result would
be anti-dilutive.
3. Acquisitions/Divestitures:
On April 30, 1998, the Company successfully completed divestiture of its
electron beam accelerator and related equipment for the approximate sum of
$1,250,000. The proceeds of the sale were immediately used by the Company
to repay the entire balance of a bank note against the beam for
approximately $402,000, and the residual monies were applied against the
Company's financing agreement with its commercial lender.
8
<PAGE>
The sale of the beam completes the decision by the Company's Board of
Directors to focus the Company on its core Instrument Set sterilization
processing business. Revenues from the business divested approximated
$4,100,000 and $3,800,000 for the years ended December 31, 1997 and 1996,
respectively.
On August 3, 1998, SSI Surgical Services, Inc. ("SSI"), a joint venture
company between TFX Equities, Incorporated ("TFX"), a wholly owned
subsidiary of Teleflex, Incorporated ("Teleflex"), and the Company formed
in May, 1997, acquired all the assets of Sterilization Management Group
("SMG"). SMG currently operates 5 sterile processing facilities,
principally involved in the sterilization and reprocessing of reusable
gowns and set-up packs, based in McGraw Park, Illinois, Baltimore,
Houston, Tampa and Detroit. Four of these facilities have Instrument Set
sterilization processing capabilities and SSI plans to upgrade the fifth
to include Instrument Set sterilization processing so that all of the
facilities can focus on this added business opportunity. Through these
facilities, SMG currently employs approximately 120 full-time employees,
and provides sterile and non-sterile operating room gowns, surgical towels
and set-up packs to approximately 130 hospitals in 11 states. SMG had
approximately $11.0 million (unaudited) in revenues for the twelve months
ending December 31, 1997.
As of April 1998, SSI had also entered into several multi-year contracts
to provide long-term on-site management and sterile processing services
totaling over $20.0 million.
Based on the Company's interest in a rapidly growing SSI, the Company now
has expanded from a regional sterilization processing facility to one with
a national footprint. It should be noted, however, that the joint venture
with SSI does not materially impact the financial position or results of
operations of the Company at this time.
4. Subsequent Events:
As of October 1998, the Company has entered into several loan agreements
with TFX, a wholly owned subsidiary of Teleflex. The principal amount of
the loans total $400,000 and bear interest at the rate of prime plus one
and one-half percent. The notes are due and payable on December 31, 1998.
On October 15, 1998, the Company signed a short-term sublease agreement
through February 28, 1998. The agreement provides for the sublease of
50,000 square feet of its premises at a rental plus other reimbursements
of approximately $100,000.
9
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Current Assets have decreased approximately $1,808,000 to $2,041,179 at
September 30, 1998 compared to $3,849,226 at December 31, 1997. The decrease was
primarily due to the decrease in assets held for sale of $1,250,000 related to
the successful completion of the divestiture of the electron beam accelerator
and related equipment and an approximate $657,533 decrease in accounts
receivable offset by an increase in cash of approximately $67,518 and an
approximate $45,612 increase in prepaid expenses. The Company had negative
working capital of approximately $308,452 at September 30, 1998 compared to
positive working capital of approximately $1,529,850 at December 31, 1997. This
decrease of approximately $1,838,302 was primarily the result of the decrease in
assets held for sale of $1,250,000 related to the successful completion of the
divestiture of the electron beam accelerator and related equipment, the decrease
in accounts receivable of approximately $657,533, the increase in accounts
payable and accrued expenses of approximately $563,628 and new loan agreements
with TFX, totaling $300,000 due December 31, 1998, offset in part by the
repayment of the current portion of debt of approximately $851,836 and an
increase in cash of approximately $67,518. There was a decrease in the working
capital ratio, to 0.87 to 1 at September 30, 1998 from 1.66 to 1 at December 31,
1997. This was directly the result of the sale of the beam, subsequent reduction
in accounts receivable and the net impact to payables described above.
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. Management also
plans to purchase additional surgical instruments, as and if required to support
the Company's hospital sterilization growth objectives. 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, the $400,000
loan from TFX 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.
INFLATION
The Company does not anticipate that inflation will have any significant
effect on its business particularly since the United States, the only market in
which the Company currently intends to operate, is presently experiencing a
relatively low rate of inflation.
10
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
RESULTS OF OPERATIONS
REVENUES
Revenues for the nine months ended September 30, 1998 decreased
approximately $1,454,000 or 20.1% to approximately $5,795,000 from revenues of
approximately $7,249,000 for the nine months ended September 30, 1997. The
decrease in revenues was primarily attributable to an approximate $2,615,000
decrease in revenues or a 85.1% decrease in the Company's contract sterilization
and radiation processing of industrial products services in line with the
Company's decision to divest this business, offset by an approximate $1,161,000
or 27.8% increase in the Company's revenue in its hospital services division.
Revenues for the three months ended September 30, 1998 decreased
approximately $618,000 or 24.5% to approximately $1,898,000 from revenues of
approximately $2,516,000 for the three months ended September 30, 1997. The
decrease in revenues was primarily attributable to an approximate $984,000
decrease in revenues or a 99.4% decrease in the Company's contract sterilization
and radiation processing of industrial products services in line with the
Company's decision to divest this business, offset by an approximate $366,000 or
24.0% increase in the Company's revenue in its hospital services division.
COSTS AND EXPENSES
Total expenses decreased approximately $631,000 or 9.2% to approximately
$6,203,449 for the nine months ended September 30, 1998 compared to
approximately $6,834,786 for the nine months ended September 30, 1997. Operating
expenses have decreased approximately $784,000 or 17.7% due to a reduction in
salary, utility and other costs related to the divestiture of the electron beam
accelerator partially offset by increases in salaries and supplies to support
the increased sales volume in the hospital services division. Distribution costs
have increased approximately $172,000 or 43.9% due to increased driver salaries
and other costs related to increased sales volume and expanded geographical
coverage in the hospital services division. Selling, general and administrative
expenses have decreased approximately $18,000 or 1.1% due primarily to reduced
11
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
administrative salary expenditure attributed to the hospital services division.
Interest expense decreased approximately $38,000 or 10.5% due to the sale of the
beam and the subsequent repayment of debt.
The decrease in total expenses for the nine months ended September 30,
1998, was limited by several factors attributed to the divestiture of the
electron beam business, as well as, other nonrecurring expenditures. The Company
is currently evaluating long-term sublease offers on its facility to offset
approximately $229,000 in unabsorbed plant rental and realty taxes associated
with the discontinued electron beam business that are currently included in
operating expenses for the nine months ended September 30, 1998. Operating
expenses also include approximately $176,000 of other one-time costs related to
the liquidation of the electron beam business. In addition to these items, the
Company is effecting further reductions in selling, general and administrative
expenses.
Total expenses decreased approximately $225,000 or 9.8% to approximately
$2,077,757 for the three months ended September 30, 1998 compared to
approximately $2,302,606 for the three months ended September 30, 1997.
Operating expenses have decreased approximately $382,000 or 24.9% due to a
reduction in salary, utility and other costs related to the divestiture of the
electron beam accelerator partially offset by increases in salaries and supplies
to support the increased sales volume in the hospital services division.
Distribution costs have increased $54,000 or 37.2% due to increased driver
salaries and other costs related to increased sales volume and expanded
geographical coverage in the hospital services division. Selling, general and
administrative expenses have increased approximately $160,000 or 33.4% due
primarily to one-time termination expenses incurred as a result of the
elimination of an Officer's position ($84,000) and the write-off of residual
E-Beam assets ($51,000) and an increase in the provision for bad debt ($24,000).
Interest expense decreased approximately $56,000 or 38.8% due to the sale of the
beam and the subsequent repayment of debt.
The decrease in total expenses for the three months ended September 30,
1998, was also limited by approximately $87,000 in unabsorbed plant rental and
realty taxes associated with the discontinued electron beam business that are
currently included in operating expenses for the three months ended September
30, 1998.
12
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
NET INCOME (LOSS)
APPLICABLE TO COMMON SHAREHOLDERS
Net loss applicable to common shareholders was approximately ($491,000) or
($.15) per share on a diluted basis for the nine months ended September 30, 1998
compared to net income applicable to common shareholders of approximately
$322,000 or $.06 per share for the nine months ended September 30, 1997 on a
diluted basis. Basic earnings per share for the nine months ended September 30,
1998 represented a net loss per share of approximately ($.15) compared to net
income per share of approximately $.10 for the nine months ended September 30,
1997.
Net loss applicable to common shareholders was approximately ($207,000) or
($.06) per share on a diluted basis for the three months ended September 30,
1998 compared to net income applicable to common shareholders of approximately
$183,000 or $.03 per share for the three months ended September 30, 1997 on a
diluted basis. Basic earnings per share for the three months ended September 30,
1998 represented a net loss per share of approximately ($.06) compared to net
income per share of approximately $.06 for the three months ended September 30,
1997.
13
<PAGE>
MEDICAL STERILIZATION, INC.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-KSB
(b) There were no reports on Form 8-KSB filed by the registrant during
the three months ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
This Form 10-QSB contains statements concerning certain trends and other
forward-looking information affecting or relating to the Company and its
industry that are intended to qualify for the protections afforded
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. There are many important factors that could cause actual results to
differ materially from those in the forward-looking statements. Many of these
important factors are outside MEDICAL STERILIZATION, INC.'s control. Changes in
market conditions, including competitive factors and changes in government
regulations, could cause actual results to differ materially from the Company's
expectations. No assurance can be provided as to any future financial results.
MEDICAL STERILIZATION, INC.
Date November 13, 1998 /s/ D. Michael Deignan
----------------- ----------------------------------------
D. Michael Deignan, President/C.E.O. and
Principal Financial Officer
/s/ Ivan Zubin
----------------------------------------
Ivan Zubin, Director of Finance and
Principal Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 99,964
<SECURITIES> 0
<RECEIVABLES> 1,922,939
<ALLOWANCES> (189,339)
<INVENTORY> 56,959
<CURRENT-ASSETS> 2,041,179
<PP&E> 11,613,218
<DEPRECIATION> (5,611,938)
<TOTAL-ASSETS> 8,173,605
<CURRENT-LIABILITIES> 2,349,631
<BONDS> 0
31,704
0
<COMMON> 1,859,647
<OTHER-SE> 1,227,200
<TOTAL-LIABILITY-AND-EQUITY> 8,173,605
<SALES> 5,794,905
<TOTAL-REVENUES> 5,794,905
<CGS> 3,656,249
<TOTAL-COSTS> 5,880,457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 322,992
<INCOME-PRETAX> (408,544)
<INCOME-TAX> 0
<INCOME-CONTINUING> (408,544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (490,687)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
